Uncommon Sense Scrutiny: Thinking about... Information

Reducing Uncertainty: Of Information, Knowledge and Decision-making…

"The great end of life is not knowledge, but action. " - T. Huxley

What do we mean by information? Why do we get information? What is the difference between information and knowledge?

If we examine three differing environments and their information requirements, we may find that there are common characteristics that will enable us to find answers to these important questions:

Environment 1: Sport of Kings

The scenario is relatively simple: there are a fixed number of horses in any race, each of which has a jockey on it, and a fixed distance that the horses have to cover.  These elements are static, and are known to all punters beforehand.  The factors that are variable and therefore determine the risk of betting are the weather, the abilities of the horses and jockeys, and the odds of each horse.

The weather only has an effect if it rains beforehand or if there are crosswinds; If it rains, that means the ground will be ‘yielding’; some horses perform better under these conditions. If you want to make money on the ‘gee-gees’ you’re going to have to beat the odds.  This means not only placing bets that offer a good return on investment, but also predicting winners and places more often then losers and also-rans.  The return on investment ratio is established by the beliefs of the majority.  The more money bet on a horse, the greater the collective consensus that this horse has a high probability of winning.  Hence, the ‘odds’ on the horse will be low, and the return on investment low.  Those horses that have little money bet on them will have higher ‘odds’ i.e. The belief will be that there is a  lower probability that they will win, and the potential return on investment high. But is the majority vote right? Making large returns on the horses is really about voting consistently against the majority vote and being right more often than wrong. Betting and winning on favourites doesn’t pay much.

One way to assess whether the majority are likely to succeed is to review the form book: How well have these horses performed over the distance that the race is over?  Which horses did they compete against in these races?  Where were the races held? When they were successful, was the ground ‘yielding’ or ‘firm’?  Where were they drawn?  Was there a bend in the track?  Did the horse wear blinkers?  Which jockey was in the saddle at the time?

If I can get answers to these questions, I will be informed, and therefore in a better position to make my betting decisions. But once I have all this information, I need something else if I am to use it effectively.  I must have understanding with which to interpret how these variables interact otherwise I may as well follow the local daily’s tips.  This understanding includes the ideas of synthesis (seeing how the elements of a whole work together) and experience – it is more than information; it is the result of knitting the information together into a reality model that closely represents the reality, close enough to enable decisions to be made in that reality that offer predictable outcomes. Information alone will not do this for you.

My thinking may go something like this:

“ ‘Bright Eyes’ has the best form over this distance, but the jockey who was riding him is not available today. ‘Napoleon’ has the next best form, but is carrying a little more weight than he’s accustomed to, and it rained last night. “ ‘Cascade’ has done well over a slightly shorter distance, is carrying less weight and has an experienced jockey aboard, looks to have a good chance.”

Of course, there is also the possibility that a new horse and jockey combination, who have been working well together just recently and will be known to ‘insiders’ and those on the grapevine, will bring a degree of unpredictability to the scenario if you’re not ‘in the loop’. In addition, my selection may get scratched just before the race…

There are other people who refuse to acknowledge that the future can be predicted by studying the past – those who believe in numerology, astrology, dreams and synchronicity have at times achieved success rates that defy logic.

It seems that, however well informed you are regarding the horses, trainers and jockeys, there is still uncertainty that you can’t eradicate, because the information is imperfect. The limiting factor, i.e. the factor that determines your ability to maximise your returns, is that very fact – your information is imperfect. Seems there is no such thing as a ‘Dead cert’…

Environment 2:  Random Walk

The Stock Exchange. Some say it is a ‘zero-sum’ game because winners and losers are just two sides of a coin, and any transaction is much like placing a bet – the seller may be betting that the share price is going to go down, while the buyer may be betting the opposite. One will win, the other will lose. In this environment, then there are a number of questions one should be asking: 

Which shares should I buy?  How shall I distribute my capital?  How long should I leave my money in a stock before expecting return?  When should I sell? What returns should I expect?

There are two belief systems driving stock exchange investment: technical analysis and fundamental analysis.  Whichever set of beliefs you choose to embrace will offer the kind of information on review in order to make investment decisions.  In fundamental analysis, company performance is important, the question ‘how profitable is this company’ is one that technical analysts couldn’t care less about – their only concern is the price trend.

If you study the stock market over the very long run, the price trend is always upwards. This means that if you just leave your money in a selected stock, and the company does not go insolvent, the chances are that the value of your share will increase. But will it increase at a rate that you can’t better by putting your money elsewhere? Once again, you want to beat the ‘odds’.

In order to maximise your returns, you’re going to have to reduce the uncertainty that exists because the future is unpredictable. In an environment like the stock exchange where information is imperfect, your risk is determined by the quality of your information.

In order to reduce the uncertainty inherent in any investment in an indeterminable future, it is necessary to have answers to questions that satisfy some fundamental quality criteria: Completeness (e.g. you may have some idea of price changes but not the reasons why), Relevance (avoiding data overload; large quantities of data exist that lack context and structure  in relation to your specific needs), Accessibility (access to the information you need may be restricted because you’re not ‘in the loop’ with the inner circle), Timeliness (how people are investing and disinvesting you can only discover after the fact) and Accuracy (you may not have any way of auditing the accuracy of information and may be relying on ‘hearsay’ to a large extent).

Since in most cases investors do not have quality information, they have to rely on a ‘hedging’ strategy, where they cover the downside by investing some of their portfolio in low-risk investments. Others employ managers to invest their money for them, people who are on the ‘inside track’, thereby obviating the need for information about the stocks. They would, of course, need information about the fund manager’s track record. The danger is that there is no guarantee that a good historical performance automatically leads to a good future one.

The limiting factor here is the degree to which you can predict the future based on past trends. Once again, the fact that your information is imperfect is the factor that determines your ability to maximise your returns. It seems that here, too, there is always going to be a degree of uncertainty…

Environment 3: Spirit of the Entrepreneur

Business is an extremely complex environment. There are variables that impact the business that cannot be controlled; these variables can be influenced to  some extent, but the degree of influence may be so small as to be negligible. It is, however, necessary that the entrepreneur understand how these variables are changing so that adaptations may be implemented that enable the business to survive and/or thrive. However you label it, you will need information about market dynamics: who is offering what at what prices in what locations using what kind of service mechanisms and at what terms?

In getting answers to these questions, the entrepreneur becomes informed regarding the ‘playing field’. This information is not always easy to get, particularly in a changing industry.

How to interact with the external environment in a way that maximises returns involves finding ways of doing things ‘better’ than current players; Determining what constitutes ‘better’ is an exercise that includes getting answers to the following questions: What options are available? Which options will work? What resources are required? Once we are informed, and we have made our decisions,  there are the implementation issues: When shall we implement? Who will do it? When should it be done? Where? And in what order?

Once the business is established, there are operational questions: Who are our customers? Are our customers happy? Which products or services are the most profitable? The list of questions becomes endless, because the business environment is extremely complex.

“The uncreative mind can spot wrong answers, but it takes a creative mind to spot wrong questions” - A. Jay

Why do we ask questions?

We ask because there is uncertainty. The question contextualises the required answer – it provides the framework for the answer’s elements. The question determines the relevance of the answer, and so the way in which the question is phrased is critical to the answer’s ability to inform our decisions. Poor questions lead to poor decisions.

The question must also determine what would be a complete answer, and what degree of completeness would constitute sufficiency so that decisions can be made – it is unnecessary in some cases to have 100% complete information; intuition may be able to fill in the gaps.

In the same way, the accuracy required of the answer is relative; In many cases, something well short of 100% accuracy may be acceptable. In others, only absolute accuracy will be satisfactory. The question is the reference point.

In addition,  if the answers are to be useful, then I must have access to them within the question’s time-frame. Questions need due dates as well as review periods; It will not help me to have accurate, complete information if it always gets to me late or if I always have to ask someone to get it for me.

Once I have the answers, I am informed; But I am only informed if I have the ability to understand and interpret the information. Decision-making necessarily includes the concept of synthesis, seeing how the information fits into a ‘big picture’. Information is really passive; it is not going to do anything for you if you don’t know how to use it. And this is where knowledge steps in. Knowledge is really a synergy between experience, information, and understanding. The new experience triggers new questions, new ways of thinking about information, which, when provided, gives answers that deliver better understanding, thereby enabling better decisions to be made.

The Information Process – Review, Interpret, Strategise, Act – is a bubble that fits inside a larger bubble called the Knowledge Process. If information is about better answers, then knowledge is about better questions. Knowledge without information and information without knowledge are equally useless.

It is understanding of how the whole works that enable us to contextualise the impact if a particular part on the whole. Many organisations have adopted the cure-all approach of attempting to solve all of their information problems at the same time, which is neither practical nor useful. It is not practical because the resource base required to perform such a task will be huge and probably very expensive. It will not be useful because it is not focused on the organisation’s limiting factor. At any point in time, an organisation, because it is a complex system of interacting processes and resources, will have a single ‘bottleneck’. To focus one’s efforts to improve the whole anywhere else but on the bottleneck is to waste money.

It follows, then, that the organisation needs to know, at any point in time, where this limiting factor is. Determining it is important because, if it can be reduced, then the organisation’s ability to meet and exceed it’s goals is increased. The limiting factor may be a capacity constraint, a poor market mix, a restrictive policy, or even a set of behaviours. Determining it is not going to happen by reviewing information from departments or divisions or products in isolation; it will be necessary to view the whole in terms of its interactions and complexity, understanding how processes, people and technology mesh in order to deliver a value proposition to the customer. It will make no sense, for example, to spend an enormous amount of time and effort in ‘driving down costs’ when the limiting factor is that the value proposition offered to the market is not perceived as good quality.

“We expect that a new technology will bring benefits, when and only when, the new technology diminishes an existing limitation. It is simply common sense.” – Eli Goldratt, Necessary but not sufficient

It stands to reason, then, that a decision to employ technology must always be driven by a single motivation: it must improve the business by obviating or reducing the business’ limiting factor! Technology vendors will inevitably claim business benefits for the introduction of new technology; it is important that the entrepreneur investigate these claims with due diligence – there is a need to reduce the uncertainty of the decision by examining the information available. The vendor’s claims, the current business scenario (which includes the way in which processes and people will be impacted by the technology) and the opportunity cost should all be examined with a view to reducing the uncertainty of the decision.

Derek du Toit

justd@justd.ws

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