Buying Price of Event Information in Two-Action Decision Problems

Abstract

Being able to determine in advance whether certain events occur or not enables a decision maker to reduce the uncertainty of a two-action lottery, although the exact outcome of the lottery may still not be known with certainty. This paper studies the á priori value of information in such a decision making environment. Of interest to the decision maker is to compare the value of information about different events in advance of gathering the information. Using buying price as value of information, we show that when information about the occurrence of two different events are offered to a risk neutral decision maker, the event with a greater contribution in absolute value to the expected value of the lottery has higher value in terms of its buying price. For risk averse decision makers, a preference condition needs to be imposed on the set difference of two events to obtain a generic conclusion. We provide several examples that demonstrate the usefulness of these results. © 2013 Springer Science+Business Media New York.