There is no such thing as *Real* Value

Rich Mogull has started a fire on his Securosis blog addressing questions of value and loss. I would like to provide some feedback.

Most importantly, I would like to address this point:

“I consider that an implied or assumed value, which may bear no correlation to the real value”

Rich’s reference to something called a real value makes me think that he believes there is some universal notion of value about things that everyone agrees upon. This is far from accurate.

Economists have long pointed out inconsistencies in the way people determine value. They frequently differentiate between “willingness-to-pay (WTP)” and “willingness-to-accept (WTA)” as key perspectives in a transaction, where concepts like the “endowment effect” come into play. The endowment effect suggests that a person’s WTA is often higher than his/her own WTP for the same item.

Not only is there an endowment effect, but we must also be wary of whether the value is “stated” or “revealed”. That is, it is easier to say something is “priceless” (stated) than it is to turn down an offer of $10 million (revealed to be worth $10m if accepted).

There are a number of other factors that may influence “value” at given points in time – supply and demand, opportunity cost, etc. The key here is that referring to “real” value expresses a bias towards some method of calculation which may not hold true for all people all the time.

Let me be clear, because some may consider the points above as support for Rich’s assertion that calculation is impossible for information assets and therefore shouldn’t be attempted. Rather, my point is that by Rich’s argument value can’t be calculated for anything – a new car, Red Sox tickets, a week in the Bahamas, whatever – because the WTP and WTA change all the time.

Further, my point is that the only calculation that matters is the one done by the stakeholders of some asset – so that the value of an information asset is whatever the stakeholder says it is when they are performing any cost/benefit analysis. Now, let’s not belittle the stakeholders by suggesting they might make some sort of crazy estimate – most likely, their estimates will be based on information regarding costs, markets, future revenue streams, etc.

And, in fact, there are any number of techniques for determining value of all sorts of intangible assets. You can Google them or look at finance books with valuation techniques for things like mergers and acquisitions, research contingent valuation in the ecological world, etc.

Finally, I would like to make a correction: Rich’s quote above is in reference to Lindstrom’s Razor which is paraphrased incorrectly. Lindstrom’s Razor is “The digital assets in question must be worth at least as much as you pay for them.” This includes all costs associated with the digital asset and not simply the security costs as Rich asserts.