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Valuing information and options: an experimental study

✍ Scribed by Philippe Delquié

Publisher
John Wiley and Sons
Year
2008
Tongue
English
Weight
200 KB
Volume
21
Category
Article
ISSN
0894-3257

No coin nor oath required. For personal study only.

✦ Synopsis

Abstract

Participants in four studies were faced with everyday‐life decision scenarios involving risk, such as purchasing an airline ticket whose price may change. They were asked to state their maximum willingness to pay (WTP) for resolving the uncertainty with either perfect information or an option. The two are strategically equivalent, therefore, should be valued in the same way. Across all experiments, individuals tend to value the option more than the information. In addition, the distributions of responses reveal frequent and gross violations of normative bounds. Contrary to normative predictions, no relationship is found between individuals' valuation of the gamble and their reported WTP for information or option. Furthermore, although participants pay attention to the probabilities of outcomes in valuing the gambles, they ignore the probabilities in valuing uncertainty resolution. Several reasoning heuristics that participants use to come up with a value of information are identified, and it appears that the Information and Option contexts tend to trigger different heuristics. Shift in reference point and regret are consistent with the Information–Option valuation discrepancy. Copyright © 2007 John Wiley & Sons, Ltd.

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