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Ambiguity, Data and Preferences for Information - A Case-Based Approach

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  • Ani Guerdjikova
  • Jürgen Eichberger

    ()
    (THEMA, Universite de Cergy-Pontoise and THEMA
    University of Heidelberg)

Abstract

In this paper we suggest a behavioral approach to decision making under ambiguity based on available information. A decision situation is characterized by a set of actions, a set of outcomes, and data consisting of action-outcome pairs. Decision-makers express preferences over actions and data sets. We derive a representation of preferences, which separates utility and beliefs. While the utility function is purely subjective, the beliefs of the decision maker combine objective characteristics of the data (number and frequency of observations) with subjective features of the decision maker (similarity of observations and perceived ambiguity). We identify the subjectively perceived degree of ambiguity and separate it into ambiguity due to a limited number of observations and ambiguity due to data heterogeneity. We also determine the decision maker’s attitude towards ambiguity. The special case of no ambiguity represents beliefs as similarity-weighted frequencies and provides a behavioral foundation for Billot, Gilboa, Samet and Schmeidler’s (2005) representation.

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Paper provided by THEMA (THéorie Economique, Modélisation et Applications), Université de Cergy-Pontoise in its series THEMA Working Papers with number 2012-45 Classification-Jel.

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Date of creation: 2012
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Handle: RePEc:ema:worpap:2012-45

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  1. Larry G. Epstein & Martin Schneider, 2007. "Learning Under Ambiguity," Review of Economic Studies, Oxford University Press, vol. 74(4), pages 1275-1303.
  2. Grant, Simon & Chateauneuf, A. & Eichberger, J., 2002. "Choice under Uncertainty with the Best and Worst in Mind: Neo-additive Capacities," Working Papers 2002-10, Rice University, Department of Economics.
  3. Gilboa, Itzhak & Schmeidler, David & Wakker, Peter P., 2002. "Utility in Case-Based Decision Theory," Journal of Economic Theory, Elsevier, vol. 105(2), pages 483-502, August.
  4. Hume, David, 1758. "An Equiry Concerning Human Understanding," History of Economic Thought Books, McMaster University Archive for the History of Economic Thought, number hume1758.
  5. David S. Ahn, 2008. "Ambiguity Without a State Space," Review of Economic Studies, Oxford University Press, vol. 75(1), pages 3-28.
  6. Grant, S & Kajii, A & Polak, B, 1997. "Intrinsic Preference for Information," Papers 323, Australian National University - Department of Economics.
  7. Daniel Ellsberg, 2000. "Risk, Ambiguity and the Savage Axioms," Levine's Working Paper Archive 7605, David K. Levine.
  8. Antoine Billot & Itzhak Gilboa & Dov Samet & David Schmeidler, 2005. "Probabilities as Similarity-Weighted Frequencies," Econometrica, Econometric Society, vol. 73(4), pages 1125-1136, 07.
  9. Eichberger, Jürgen & Guerdjikova, Ani, 2010. "Case-based belief formation under ambiguity," Mathematical Social Sciences, Elsevier, vol. 60(3), pages 161-177, November.
  10. David Schmeidler, 1989. "Subjective Probability and Expected Utility without Additivity," Levine's Working Paper Archive 7662, David K. Levine.
  11. Ani Guerdjikova & Jürgen Eichberger, 2012. "Ambiguity, Data and Preferences for Information - A Case-Based Approach," THEMA Working Papers 2012-45 Classification-Je, THEMA (THéorie Economique, Modélisation et Applications), Université de Cergy-Pontoise.
  12. Itzhak Gilboa & Offer Lieberman & David Schmeidler, 2006. "Empirical Similarity," The Review of Economics and Statistics, MIT Press, vol. 88(3), pages 433-444, August.
  13. Ghirardato, Paolo & Maccheroni, Fabio & Marinacci, Massimo, 2004. "Differentiating ambiguity and ambiguity attitude," Journal of Economic Theory, Elsevier, vol. 118(2), pages 133-173, October.
  14. Gilboa,Itzhak & Schmeidler,David, 2001. "A Theory of Case-Based Decisions," Cambridge Books, Cambridge University Press, number 9780521802345.
  15. Gajdos, T. & Hayashi, T. & Tallon, J.-M. & Vergnaud, J.-C., 2008. "Attitude toward imprecise information," Journal of Economic Theory, Elsevier, vol. 140(1), pages 27-65, May.
  16. Gilboa, Itzhak & Schmeidler, David, 1989. "Maxmin expected utility with non-unique prior," Journal of Mathematical Economics, Elsevier, vol. 18(2), pages 141-153, April.
  17. Jurgen Eichberger & Simon Grant & David Kelsey, 2006. "Differentiating Ambiguity: A Comment," Discussion Papers 0606, Exeter University, Department of Economics.
  18. Jürgen Eichberger & Ani Guerdjikova, 2012. "Technology Adoption And Adaptation To Climate Change — A Case-Based Approach," Climate Change Economics (CCE), World Scientific Publishing Co. Pte. Ltd., vol. 3(02), pages 1250007-1-1.
  19. Manski, Charles F., 2000. "Identification problems and decisions under ambiguity: Empirical analysis of treatment response and normative analysis of treatment choice," Journal of Econometrics, Elsevier, vol. 95(2), pages 415-442, April.
  20. Grant, S. & Polak, B. & Kajii, A., 1996. "Preference for Information," Papers 298, Australian National University - Department of Economics.
  21. Ayala Arad & Gabrielle Gayer, 2012. "Imprecise Data Sets as a Source of Ambiguity: A Model and Experimental Evidence," Management Science, INFORMS, vol. 58(1), pages 188-202, January.
  22. Truman F. Bewley, 1986. "Knightian Decision Theory: Part 1," Cowles Foundation Discussion Papers 807, Cowles Foundation for Research in Economics, Yale University.
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Cited by:
  1. Ani Guerdjikova & Jürgen Eichberger, 2012. "Ambiguity, Data and Preferences for Information - A Case-Based Approach," THEMA Working Papers 2012-45 Classification-Je, THEMA (THéorie Economique, Modélisation et Applications), Université de Cergy-Pontoise.

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