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 equation is just a little different.
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 strategic combinations 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 miserably; the market was wrong or the product was wrong, or the people were wrong, etc. Even though the investment failed, the knowledge accumulated from the attempt can be exercised in many other projects in the future. While the Patent may turn out to be worthless, the knowledge gained by the team can be used over and over again. Each person gains a statistical data point in their experience set with which to assess comparable situations in the future. This is an option 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 building networks on Linkedin – this activity resembles the collection of 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. Did I mention there is an equation for that?
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. As such, the Innovation Economy itself is now a most worthy option for supporting a feeble financial system.
The ROI model is the mother of all squandered knowledge assets – the very same assets that are really purchased on a project, successful or not, are often willfully abandoned. All of the parameters of an option valuation model can now be met with social media and The Ingenesist Project integration methods. Free-range knowledge assets can then be directly financed toward business objectives. 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