Information Gaps for Risk and Ambiguity

Abstract

We apply a model of preferences for information to the domain of decision making under risk and ambiguity. An uncertain prospect exposes an individual to an information gap. Gambling makes the missing information more important, attracting more attention to the information gap. To the extent that the uncertainty (or other circumstances) makes the information gap unpleasant to think about, an individual tends to be averse to risk and ambiguity. Yet in circumstances in which thinking about an information gap is pleasant, an individual may exhibit risk- and ambiguity-seeking. The model provides explanations for source preference regarding uncertainty, the comparative ignorance effect under conditions of ambiguity, aversion to compound risk, and a variety of other phenomena. We present an empirical test of one of the model’s novel predictions.

Keywords: ambiguity, gambling, information gap, risk, uncertainty

JEL Classification: D81