In order for knowledge to become a tangible asset, we need to come to grips with the fact that human knowledge is fluid and mobile, whereas a condo or a piece of machinery is static. A machine can’t walk away if it does not like their management.
With knowledge assets, the typical “Return on Investment” (ROI) model breaks down. When assets have a mind of their own, there is no reliable way to calculate ROI without somehow corralling the asset inside some form of closed contract, a corporation, political system, social class, or by introducing barriers to exit, etc. In the modern financial system, human assets are held tangible by debt obligations – today many people go to work in servitude of debt, not in creation of new ideas.
An option* is the right, without the liability of obligation, to exercise a decision in the future. Human interaction accommodates this valuation model quite readily; it’s called free-will. Therefore the option valuation model is an adequate method to assess knowledge assets as a means of making them tangible.
The value of a financial option can be calculated if one knows the following 5 variables: The asset price, the strike price, the date of maturity, the risk free interest rate, and the volatility – or, the odds on the bet. By contrast, the ROI model requires us to know basically the same things; the cost today, the strike price (future sale price), the date of maturity, the risk free interest rate, and the probability of success – or variance of the expectation. The equations are just a little different. Option analysis estimates the present value of the right to change your mind tomorrow.
Individually, human behavior often appears chaotic and irrational, but in aggregate, we know that human behavior is really quite predictable. If you put similar people together, you get similar ideas. If you put extremely different people together, you get extremely unpredictable ideas. If you put a strategic combination of people together, you should be able to predict the variance of the ideas. This is all the information we need to place a value on our bet. If human behavior is predictable, it is tangible.
Suppose we enter into a ROI venture and it fails to meet projection. The knowledge accumulated from the attempt can be exercised in many ways in the future. While the Patent may turn out to be lesser than expected; the knowledge gained by the team can be used over and over again – this is the secret sauce of innovation that reduces future risk and therefore increases in value. We want to estimate that value. Suppose a new discovery is made midway or if tangential applications are identified. We would want the option to pursue all options. This is how a financial option works and this option has value. If the team were disbanded without somehow capturing the inventory of new knowledge assets, a very valuable set of options becomes squandered. Some companies such as Google, try not to kill an idea, they morph the idea into something else. Free-range knowledge tangibility must achieve those same objectives.
Today we see people feverishly building networks on LinkedIn. Social Networks explode during financial crisis. People are using Social Media to collect options on future opportunities. People post on social media to see and be seen by other knowledge assets as a means of collecting more options for their careers or actions. People would not be doing it if there was no intrinsic value. The next big leap will happen when knowledge tangibility is married to the financial system through the direct valuation and capitalization of options. This is done all day long on Wall Street, why not Main Street.
The Ingenesist Project specifies a method and system for knowledge inventory that would produce a variance for knowledge assets. The Percentile Search Engine would pull knowledge assets in combination that diversify variance into a highly predictable surplus assets and deficit assets. The Innovation Bank would match most worthy surplus to most worthy deficit thereby mass-producing options.
The idea of an innovation economy based on knowledge tangibility is well within our grasp technologically, culturally, and systematically. Social media has an astonishing opportunity to integrate social, creative, and intellectual knowledge assets to trade that single most important part of the puzzle, tangible knowledge assets. I suspect that this outcome will depend on whether these new tools are treated to an ROI valuation model or on an options valuation model.
* Italic used for clarity