The value of risk-reducing information

Abstract

This manuscript integrates the utility-increasing advantages of risk reductions into well-known value-of-information justifications for executive information systems (EIS). Accordingly, even some EISs which never pay for themselves financially can be advantageous if they sufficiently reduce the uncertainty of net income for “risk averse” hospitals. The manuscript demonstrates the potential importance of risk reductions in the context of a hypothetical hospital administrator charged with selecting among alternative managed care contracts, each with uncertain outcomes. An administrator representing a hospital with diminishing marginal utility from income, a standard interpretation of risk-aversion, may find that an otherwise unprofitable EIS reduces income variations (risk) sufficiently to justify its purchase.