The price for information about probabilities and its relation with risk and ambiguity

Abstract

In this article, ambiguity attitude is measured through the maximum price a decision maker is willing to pay to know the probability of an event. Two problems are examined in which the decision maker faces an act: in one case, buying information implies playing a lottery, while, in the other case, buying information gives also the option to avoid playing the lottery. In both decision settings, relying on the Choquet expected utility model, we study how the decision maker’s risk and ambiguity attitudes affect the reservation price for ambiguity resolution. These effects are analyzed for different levels of ambiguity of the act. Operating instructions for the elicitation of the reservation price for ambiguity resolution in an experimental setting are provided at the end of the article.

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Correspondence to Giuseppe Attanasi.

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Attanasi, G., Montesano, A. The price for information about probabilities and its relation with risk and ambiguity. Theory Decis 73, 125–160 (2012). https://doi.org/10.1007/s11238-011-9271-6

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Keywords

  • Ambiguity aversion
  • Choquet expected utility
  • Information about probabilities
  • Reservation price for ambiguity resolution
  • Option value

JEL Classification

  • D81
  • D83
  • C91