Stochastic Preference and Information Value
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As we have seen time and again, the economic value of information depends not only on the decision problem and the statistical characteristics of prior knowledge and informativeness; it also depends on the decision maker’s preferences—preferences on the willingness to bear risk, and preferences on the choice of decision criterion. Chapter 7 brings these preferences to the forefront. The chapter begins by recasting the approach of Chapters 2 and 3 into an alternate, equivalent, and oftentimes enlightening viewpoint for formulating and analyzing decision problems under uncertainty. In this alternative formulation, the DM does not choose from among alternative actions, but rather from among the alternative probability distributions on wealth that are induced by the choice of a specific action or decision rule. Dealing directly with choice from among univariate probability measures over cash amounts puts the focus on the DM’s attitude towards risk as a determinant of information value. The chapter concludes with the topic of aversion to information, which can arise when a DM does not obey the standard linear expected utility criterion.
KeywordsRisk Averter Risk Premium Reservation Price Initial Wealth Absolute Risk Aversion
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