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Governance Reimagined: Organizational Design, Risk, and Value Creation by David R. Koenig

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Chapter 10

Value Revisited

In Chapter 1, we discussed how to arrive at the value of any item via an exchange between two or more willing parties. In very simple terms, the value of something at a particular moment in time is what someone else is willing to give you for it, be it live ducks or money. Money that isn't backed by a commodity or other asset has value simply because a government will accept it in exchange for tax liabilities. The exchanges in our early examples were based on relatively certain outcomes. If you traded two shoes for one live duck and five dollars, you knew exactly what you were getting. When you made a loan to Cousin Louie, you were assured that he would pay you back.

But the world is far from certain in most cases. Even in the simple exchanges above, there is an underlying uncertainty about the future value of the things that were exchanged. Relationships with businesses or interactions among political economies are also uncertain. They are highly complex and evolve over time. Further, the benefits of these relationships can vary in both magnitude and timing.

In the parlance of mathematics and finance, the outcomes of complex interactions like these are stochastic or, more accurately, quasi-stochastic—they are not known with certainty. Don't choke on that expression too much. Know, though, that the Value Equation that we are trying to utilize still works well even in these very complex relationships, where the value we receive in the future, if any, ...

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