Value of Information

dollar value of information - by risk cost foregone, contracting information providers, revealed preference

Suppose some number of potential outcomes with different payoffs and you have no idea the odds, so you assume 50/50.

5 sources of value for my information:

1. Define potential outcomes.
2. Define payoffs of outcomes.
3. Define probabilities of each outcome.
4. Increase expected utility of good outcome and decrease of bad outcome. 4 ways:
   1. Change risk preference, or change utility function w/out changing real outcomes.
   2. Change probabilities of events, but not payoffs.
   3. Change payoffs, but not probabilities.
   4. Combination
5. Combination

Profit potential trading up to risk neutrality.

4 Measures of this value:

1. Risk cost in dollars foregone.
2. Revealed preference of information provision consumption - hiring teachers, consultants, researchers, and so on.
3. Piece of mind and/or arbitrary gains to subjective utility - When people are risk averse, and most are, there can be a utility gain even without a dollar cost reduction.

Rationality of risk neutrality:

1. Most efficient because risk-averse allows insurance profit, but risk loving allows gambling profit. Risk neutral allows neither form of premium: It internalizes risk cost.
2. If risk averse, risk neutral, and risk loving are the only possibilities and we have no idea which is best then risk neutral is risk-minimizing choice, because it is the average.