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Technical Note—The Effect of Risk Aversion on the Expected Value of Perfect Information

Author

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  • Abraham Mehrez

    (Ben-Gurion University of the Negev, Beer Sheva, Israel)

Abstract

We consider the value of information when the decision-maker is averse to risk, and identify a bound on the maximal amount that the decision-maker is willing to pay to completely reduce uncertainty. We show that, for a class of unfavorable projects with nonpositive expected monetary value, a decision-maker neutral to risk is willing to pay at least as much for perfect information as is a decision-maker who is averse to risk. Finally, we analyze the effect of shifting the mean of the a priori distribution of the project's monetary value, and calculate the value of perfect information for a family of utility functions and a class of symmetric distributions centered at zero.

Suggested Citation

  • Abraham Mehrez, 1985. "Technical Note—The Effect of Risk Aversion on the Expected Value of Perfect Information," Operations Research, INFORMS, vol. 33(2), pages 455-458, April.
    • Handle: RePEc:inm:oropre:v:33:y:1985:i:2:p:455-458
    DOI: 10.1287/opre.33.2.455
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    Citations

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    Cited by:

    1. Niyazi Onur Bakir, 2015. "Monotonicity of the Selling Price of Information with Risk Aversion in Two Action Decision Problems," Central European Journal of Economic Modelling and Econometrics, Central European Journal of Economic Modelling and Econometrics, vol. 7(2), pages 71-90, June.
    2. Mehrez, Abraham, 1997. "The interface between OR/MS and decision theory," European Journal of Operational Research, Elsevier, vol. 99(1), pages 38-47, May.
    3. 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.
    4. Adam Fleischhacker & Pak-Wing Fok & Mokshay Madiman & Nan Wu, 2023. "A Closed-Form EVSI Expression for a Multinomial Data-Generating Process," Decision Analysis, INFORMS, vol. 20(1), pages 73-84, March.
    5. Zou, Guang & Faber, Michael Havbro & González, Arturo & Banisoleiman, Kian, 2021. "Computing the value of information from periodic testing in holistic decision making under uncertainty," Reliability Engineering and System Safety, Elsevier, vol. 206(C).
    6. J. Eric Bickel, 2008. "The Relationship Between Perfect and Imperfect Information in a Two-Action Risk-Sensitive Problem," Decision Analysis, INFORMS, vol. 5(3), pages 116-128, September.
    7. Zhengwei Sun & Ali E. Abbas, 2014. "On the sensitivity of the value of information to risk aversion in two-action decision problems," Environment Systems and Decisions, Springer, vol. 34(1), pages 24-37, March.

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