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Lottery Acquisition versus Information Acquisition: Prices and Preference Reversals

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  • Hazen, Gordon B
  • Sounderpandian, Jayavel

Abstract

Suppose you must choose between two pieces of information: A and B. In the absence of cost, you would prefer to obtain A rather than B, and in fact would be willing to take more risk to obtain A than B. Nevertheless, you would pay more money for B than for A. Are your preferences consistent with expected utility? The answer is yes; they may very well be. We give an example to illustrate how this may happen, and relate this reversal phenomenon to the well-known discrepancy between buying and selling prices for lotteries. Along the way, we demonstrate that even though selling an information source is strictly analogous to selling a lottery, buying an information source is not strictly analogous to buying a lottery. However, for any collection of lotteries there is a decision problem with corresponding information sources, each source having both buying price and selling price equal to the buying and selling prices of the corresponding lottery. The existence of preference reversals for mode of information acquisition dispels any notion that the relative value of competing information acquisitions should not depend on the nature of the acquisition. Among expected utility maximizers, only those with constant risk attitude avoid these reversals. Copyright 1999 by Kluwer Academic Publishers

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  • Hazen, Gordon B & Sounderpandian, Jayavel, 1999. "Lottery Acquisition versus Information Acquisition: Prices and Preference Reversals," Journal of Risk and Uncertainty, Springer, vol. 18(2), pages 125-136, August.
    • Handle: RePEc:kap:jrisku:v:18:y:1999:i:2:p:125-36
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    Cited by:

    1. Borgonovo, Emanuele & Hazen, Gordon B. & Jose, Victor Richmond R. & Plischke, Elmar, 2021. "Probabilistic sensitivity measures as information value," European Journal of Operational Research, Elsevier, vol. 289(2), pages 595-610.
    2. Janzwood, Scott, 2021. "R&D priority-setting for global catastrophic risks: The case of the NASA planetary defense mission," Research Policy, Elsevier, vol. 50(6).
    3. Niyazi Onur Bakır & Georgia-Ann Klutke, 2014. "Buying price of event information in two-action decision problems," Environment Systems and Decisions, Springer, vol. 34(1), pages 38-48, March.
    4. Emanuele Borgonovo & Alessandra Cillo, 2017. "Deciding with Thresholds: Importance Measures and Value of Information," Risk Analysis, John Wiley & Sons, vol. 37(10), pages 1828-1848, October.
    5. 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.
    6. James C. Felli & Gordon B. Hazen, 2004. "Javelin Diagrams: A Graphical Tool for Probabilistic Sensitivity Analysis," Decision Analysis, INFORMS, vol. 1(2), pages 93-107, June.
    7. 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.
    8. Borgonovo, Emanuele & Plischke, Elmar, 2016. "Sensitivity analysis: A review of recent advances," European Journal of Operational Research, Elsevier, vol. 248(3), pages 869-887.
    9. BakIr, Niyazi Onur & Klutke, Georgia-Ann, 2011. "Information and preference reversals in lotteries," European Journal of Operational Research, Elsevier, vol. 210(3), pages 752-756, May.
    10. Mercedes Boncompte Pons & María del Mar Guerrero Manzano, 2024. "The value of perfect information for the problem: a sensitivity analysis," Environment Systems and Decisions, Springer, vol. 44(4), pages 980-993, December.

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