, Volume 2, Issue 1, pp 37-60

Preferences for information on probabilities versus prizes: The role of risk-taking attitudes

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Abstract

Many real-world decisions entail choices between information on either probabilities or payoffs (i.e., prizes). Simplified versions of such decisions are examined to gain insight into preferences for different types of information as a function of risk-attitudes. General and simple decision rules are derived for cases where the utility function is concave (or convex) over the relevant payoff interval.

The article further describes several experiments to test business students' intuitions concerning these optimal decision rules. In general, risk-taking attitudes did not correlate significantly with subjects' preferences for information, in violation of theorems regarding mean-preserving spreads of risk. Other tests, e.g., narrowing certain probability ranges, also resulted in preferences contrary to expected utility (EU) theory.

Behavioral and economic explanations are examined for people's limited insights into the value of information. The main experimental results are proved to be counter to subjective expected utility (SEU) theory as well as EU. Subjects appear to use heuristics in which probability is not treated linearly, second-order probability matters, and nonmultiplicative integration occurs with prizes.

University of Chicago