Attitude towards Risk, Prospect Variability, and the Value of Imperfect Information

• Published in: Southern economic journal Vol. 59; no. 2; pp. 194 - 209
• Main Author: Lawrence, David B.
• Format: Journal Article
• Language: English
• Published: Chapel Hill, N.C., etc Southern Economic Association and the University of North Carolina at Chapel Hill 01.10.1992; Southern Economic Association; Southern Economic Association and the University of North Carolina
• Subjects: Analysis; Attitudes; Behavior; Decision making; Decision theory; Economic models; Economic theory; Expected utility; Financial risk; Imperfect information; Information economics; Information storage and retrieval systems; Information systems; Information value; Marketing; Perfect information; Risk; Risk assessment; Risk aversion; Risk aversion preference; Studies; Utility functions; Value
• ISSN: 0038-4038; 2325-8012
• DOI: 10.2307/1060525

The value of imperfect information as it depends upon the decision maker's attitude toward risk is investigated. When comparing the choices made and the prospects accepted by risk-averse decision makers with their risk-neutral counterparts, the definitive relationships both in the uninformed and informed situations do not necessarily lead to definitive statements signing the difference between the value of information to a risk-averter and the value of information to a risk-neutral decision maker. The key is that although the utilization of cost-free, non-useless information increases the expected utility for all decision makers, it does not necessarily leave the riskiness of the optimal prospects unchanged. This aspect is relevant only to the risk-averse decision maker's valuation. In the most general situation, in which both the prior and the preposterior prospects may be different, it is sufficient that the prior distribution of the posterior risk-neutral mean be Rothschild-Stiglitz more variable than the prior risk-neutral optimal prospect.