Transactions, Auctions and Economic Value

An important aspect of any economic transaction is that it represents the conclusion of an auction, however simple, however formal, however significant or trivial its outcome.  “Economic transactions” are the name we give to the human process by which multiple people arbitrate economic value.  The successful conclusion of an economic transaction represents a difficult-to-reversecognitive commitment by the participants to a balance of trade-offs, or economic utility.

Trade-off balancing in real life is not always easy.  You and I know what it is like to “waffle”, to be uncertain about a choice in the face of uncertainty, to fear the impact of difficult decisions.  You and I know what it is like to put off these difficulties, sometimes for the rest of our lives, because we are uncertain which choice would lead to greatest happiness or least pain.  I am sure you know what it is like to stand before two expensive products you like, perhaps two similar automobiles you wish to buy or two homes, and fret over the uncertain of which choice would be best.  The result of a successful economic transaction however is the act of committing to one decision or another, “placing your money where your mouth is” and coming to a decisive conclusion.  Anyone who has ever been in a difficult choice situation should immediately recognize the true value of intellectual commitment in the face of uncertainty.  Without an actual trade between individuals, without committing to a transaction which is difficult to reverse, decisions can waffle forever and die on the vine.  Goods may never be created.  Services never executed.  Resources never harvested.  Precious time in the lives of humans never put to good use.  The commitment aspect of the economic transaction is the root of economic value.

Mathematicians, engineers and computer programmers are painfully familiar with the difficulty of developing machinery to perform trade-off optimization.  While tools such as linear programming have been introduced over time to tackle problems which cannot be solved exactly through methods of strict analysis, we human beings bring our unique capacity of inductive reasoning to bear to perform this work ourselves with amazing efficiency.  While inductive reasoning, value optimization and in fact the very ability to identity values which ought to fall in to any economic trade-off scenario are the lifeblood of human societies and individuals alike, the occurrence of these phenomena are often neglected by the business and even information technology architect.  The reason is, simply, that deductive-analytic exercises are relatively simple to do while inductive exercises are, if not difficult to identify, difficult-to-impossible to describe and analyze.

Difficulty in analysis however is no excuse to ignore sources of true economic value in any architectural description.  After all what is the purpose of any business or I/T architecture other than to create an environment where economic value can be optimized?  At the very least, armed with an understanding of what economic value is, the architect could develop “heat maps” of potential economic value.  Difficulty of analysis can used as an indicator of trade-off difficulty.  Where trade-off decisions are difficult, their potential committed solutions can be sources of some of the greatest economic value in any human collaboration.  This idea is also explored in disciplines such as information economics, business measurement theory and quality attribute theory in information technology.

In future posts I will write about the applicability of the “transaction” metaphor to quantum mechanics, as well as the use of heat maps in risk analysis.

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“Venture Capital and the Finance of Innovation” (Metrick and Yasuda)

For the I/T architect, or the architect of any stripe, I highly recommend the book, Venture Capital and the Finance of Innovation by Andrew Metrick and Ayako Yasuda,

http://www.amazon.com/Venture-Capital-Finance-Innovation-Metrick/dp/0470454709

Even if you are fortunate to have others available to perform these calculations for you, understanding “the VC method” provides you with yet another way to increase your fidelity to the ethical imperative: identifying with the business owner’s typical decision processes and understanding their value metrics.