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Valuing information: an experimental study

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The author investigates how individuals value information about a simple prospect. Subjects were presented with hypothetical risky decisions, such as purchasing an airline ticket whose price is uncertain. They were asked to evaluate opportunities to resolve the uncertainty by acquiring either perfect information or an option on the uncertain outcome. The two are strategically equivalent, therefore, should be valued in the same way. The author derives Expected Utility benchmarks for valuation of information, and compares individuals' responses to these benchmarks, with particular regard to how individuals valuation of information may depend on their risk aversion. Across all experiments, he finds some evidence that individuals tend to value the option higher than strategically equivalent information. In addition, the distributions of responses reveal frequent violations of normative benchmarks, and they suggest that individuals just do not know how to frame the task of valuing information. He identifies several reasoning heuristics that subjects use to think about the value of information. These heuristics (1) focus on partial aspects of information value, which tend to be the positive aspects in the Option frame and the negative aspects in the Information frame; and (2) seem completely insensitive to the probabilities of the prospect.

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