I’m told we live in the information age, and it’s surprising to find that the information technology (IT) industry has no idea what information is. Oddly enough economists, sociologists, communications engineers and people in several other professions do. So here it is:
Information reduces uncertainty
If the stuff you store in your petabyte databases isn’t doing this, then it’s not information, it’s data – just magnetized zeroes and ones on the surface of a disk. Now it turns out that information has a rigorous mathematical definition. I’ll avoid the math, because it is said that one equation will reduce readership by a factor of 10. But it’s probably better explained in words anyway.
Imagine you have a die (or dice) which has five sides painted white, and one side painted black. You wouldn’t be particularly surprised if a white side was showing after it was thrown. In actual fact you may decide it’s worth betting the farm on this dice, given that you get two farms if a white side shows. In a business context, we can imagine that when monthly sales nearly always come in at $10 million we are hardly going to be surprised in they come in at $10.2 million next month. Somewhere around $10 million holds little information value, other than telling us that it’s steady as she goes. Now imagine that for two months sales come in at $5 million – now that’s information. It’s unexpected and says that something has probably changed – for the worse. The mathematics would tell you that there is much more information associated with a $5 million month than the predictable $10 million.
Now consider another scenario. Imagine a highly seasonal, fashion driven business where monthly revenues regularly range anywhere between $5 million and $10 million. That $5 million month will mean much less, and again the math would show this.
So how does information reduce uncertainty. Here are five numbers – 2, 5, 11, 35, 43. If I tell you they are next week’s lottery numbers I have eliminated a huge uncertainty for you. And this also illustrates that information has a value. How much would you be willing to pay for this information? Whatever it is, that is the value you place on it.
When we look at how contemporary analytical tools are being used we can immediately see that all we are trying to do, day in and day out, is reduce uncertainties. Which customers will churn, which transactions look fraudulent, who are the best prospects to target with a new promotion? Ultimately it all reduces to probabilities and finding the course of action that is most appropriate. But it’s worth remembering that three word definition – information reduces uncertainty, because it focuses our efforts and very succinctly legitimizes the millions of dollars we spend on technology.