The Effects of Imprecise Probabilities and Outcomes in Evaluating Investment Options

• Published in: Management science Vol. 51; no. 12; pp. 1791 - 1803
• Main Authors: Du, Ning, Budescu, David V
• Format: Journal Article
• Language: English
• Published: Linthicum, MD INFORMS 01.12.2005; Institute for Operations Research and the Management Sciences
• Series: Management Science
• Subjects: Ambiguity; ambiguity aversion; Applied sciences; Attitudes; Behavior; Business investment; Business management; Business studies; Decision making; earnings forecasts; Economic forecasts; Economic models; Equity; Exact sciences and technology; Expected utility; Expected values; Financial information; Financial investments; Forecasts and trends; Imprecise probabilities; Investment; investment decision; Investment decisions; Investment risk; Investment strategies; Investments; Investors; Management science; Operational research and scientific management; Operational research. Management science; Probability; Probability distribution; Probability forecasts; Profit; Profits; Return on equity; risk and uncertainty; Risk assessment; Risk theory. Actuarial science; Small & medium sized enterprises-SME; Small business; Stock exchanges; Studies; Uncertainty; vagueness; United States; Profitability; Imprecise probability; Probabilistic approach; Decision making; investment decision; Irregularity; Empirical method; vagueness; Risk analysis; Forecasting; Risk aversion; Uncertain system; Economic model; earnings forecasts; Pricing; risk and uncertainty; Anomaly; ambiguity aversion; Investment
• ISSN: 0025-1909; 1526-5501
• DOI: 10.1287/mnsc.1050.0428

Vagueness attitudes have been used to explain anomalies and irregularities in investment behavior. It is generally assumed (Ellsberg 1961) that decision makers (DMs) dislike vagueness, but this assumption has been challenged by empirical results documenting systematic alternative attitudes to vagueness as a function of its source, the domain of the decisions, and the response mode used. We investigate these three factors in a within-subjects design that was embedded in an investment context. DMs evaluated investment options that varied in terms of their sources of vagueness (probabilities and/or outcomes), in both domains (gains or losses), and employed two response modes (pricing or choice). We confirm that individuals’ vagueness attitudes are malleable, contingent on the dimension salience and the reference domain. In particular, we observed three distinct patterns of "reversals of attitudes" towards vagueness. Our results indicate that the ability of vagueness attitudes to predict investment behavior is limited, as decisions can be systematically influenced by task context and/or perceived gain or loss positions. Economic models may be improved by incorporating more flexible assumptions about individuals’ attitudes toward vagueness.