The effect of information on the quality of decisions

We study the effect of additional information on the quality of decisions. We define the extreme case of complete information about probabilities as our reference scenario. There, decision makers (DMs) can use expected utility theory to evaluate the best alternative. Starting from the worst case—where DMs have no information at all about probabilities—we find a method of constantly increasing the information by systematically limiting the ranges of the probabilities. In our simulation-based study, we measure the effects of the constant increase in information by using different forms of relative volumes. We define these as the relative volumes of the gradually narrowing areas which lead to the same (or a similar) decision as with the probability in the reference scenario. Thus, the relative volumes account for the quality of information. Combining the quantity and quality of information, we find decreasing returns to scale on information, or in other words, the costs of gathering additional information increase with the level of information. Moreover, we show that more available alternatives influence the decision process negatively. Finally, we analyze the quality of decisions in processes where more states of nature are considered. We find that this degree of complexity in the decision process also has a negative influence on the quality of decisions. Copyright Springer-Verlag Berlin Heidelberg 2014