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Effects of Risk Aversion on the Value of Information in Two-Action Decision Problems

Author

Listed:
  • Ali E. Abbas

    (Department of Industrial and Enterprise Systems Engineering, University of Illinois at Urbana–Champaign, Urbana, Illinois 61801)

  • N. Onur Bakır

    (Department of Industrial Engineering, TOBB University of Economics and Technology, Ankara 06560, Turkey)

  • Georgia-Ann Klutke

    (Department of Industrial and Systems Engineering, Texas A&M University, College Station, Texas 77843)

  • Zhengwei Sun

    (Department of Industrial and Enterprise Systems Engineering, University of Illinois at Urbana–Champaign, Urbana, Illinois 61801)

Abstract

This paper analyzes the value of information in a two-action decision problem where a decision maker is deciding on whether to accept an uncertain investment. We investigate the effects of the decision maker's risk aversion function on the value of information in this setting. We analyze the value of perfect information and the value of partition information where a decision maker with deterministic initial wealth receives information specifying that the outcome lies within a subset of the domain. We show that if two decision makers reject the investment without the information, then the more risk-averse decision maker will value information (both perfect and partition), less than the less risk averse one. On the other hand, if both decision makers initially accept the investment, or are indifferent to the investment without the information, then (i) the more risk-averse decision maker will value perfect information higher than the less risk-averse one, but (ii) this monotonicity result need not apply for the case of partition information. These results enable us to compare the value of information when decision makers have different risk aversion levels. They also hold when comparison of risk aversion is restricted only to a domain defined by the lottery.

Suggested Citation

  • Ali E. Abbas & N. Onur Bakır & Georgia-Ann Klutke & Zhengwei Sun, 2013. "Effects of Risk Aversion on the Value of Information in Two-Action Decision Problems," Decision Analysis, INFORMS, vol. 10(3), pages 257-275, September.
    • Handle: RePEc:inm:ordeca:v:10:y:2013:i:3:p:257-275
    DOI: 10.1287/deca.2013.0275
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    References listed on IDEAS

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