Ambiguity, data and preferences for information – A case-based approach

Abstract

International audienceWe model decision making under ambiguity based on available data. Decision makers express preferences over actions and data sets. We derive an α-max–min representation of preferences, in which beliefs combine objective characteristics of the data (number and frequency of observations) with subjective features of the decision maker (similarity of observations and perceived ambiguity). We identify the subjectively perceived ambiguity and separate it into ambiguity due to a limited number of observations and ambiguity due to data heterogeneity. The special case of no ambiguity provides a behavioral foundation for beliefs as similarity-weighted frequencies as in Billot et al. (2005

Do Markets Prove Pessimists Right?

“…In Eichberger and Guerdjikova (), we provide an α‐max‐min expected utility (α‐MEU) representation of preferences and beliefs, when information is in the form of data sets as in the case‐based decision theory initiated by Gilboa and Schmeidler (). The beliefs are given by a set of probability distributions.…”

“…We consider an overlapping generations (OLG) model with a risky asset and a riskless bond. Investors' preferences and beliefs are described by the case‐based α‐MEU representation developed in Eichberger and Guerdjikova (). Investors live for two periods.…”

“…We deviate from this literature by using the case‐based decision approach of Gilboa and Schmeidler () to focus on belief formation and learning. The representation developed in Eichberger and Guerdjikova () and Eichberger and Guerdjikova () allows us to study agents with heterogeneous attitudes toward ambiguity arising from insufficient data . Although for a Bayesian investor, a signal that increases the probability of an event by necessity decreases the probability of its complement, for an investor with nonadditive beliefs, information has an additional value: It reduces ambiguity.…”

Technology Adoption and Adaptation to Climate Change — A Case-Based Approach

“…Recently, Eichberger and Guerdjikova (2011) introduced a special form of CBT which allows one to distinguish optimistic and pessimistic attitudes toward ambiguity due to insufficient data. This framework can be used to operationalize Knight's (1921) notion of willingness to engage in new activities with highly uncertain outcomes, which he considers to be the main characteristic of the entrepreneurial personality.…”

“…The set of past observations is the data base available to all agents. We assume that preferences and beliefs can be represented by the CBT as axiomatized in Eichberger and Guerdjikova (2011). In order to focus on attitudes towards ambiguity, we assume that the population is divided into two extreme groups: Optimists and pessimists.…”