The value of being precise

Ning Du and David V. Budescu

Journal of Economic Psychology, 2021, vol. 83, issue C

Abstract: This study investigates how individuals assess imprecise information. We focus on two essential dimensions of decision under uncertainty, outcomes and probabilities, and their respective precision. We believe the precision of information is highly relevant in the investment setting, as reflected in the well-known “home (familiarity) bias”, and the outcome and probability dimensions, separately or jointly, may affect investors’ knowledge of uncertainty and perceived risk of the investment options, and subsequently affect investors’ choices. To test this conjecture, we conducted three experiments. Our results show that 1) participants demonstrate a pattern of preference for precision and aversion of extreme vagueness and associate vagueness with higher perceived risk and lower investment (experiments one and two); 2) participants prefer vague outcome information to vague probability information (experiment two); 3) familiarity indeed positively affects the precision of estimated values, but this association is stronger for the outcome dimension than for probabilities (experiment three). Our results confirm that precision in information, especially in the outcome dimension has an impact on investors’ resource allocation choices.

Keywords: Uncertainty; Outcomes; Probability; Precision; Vagueness; Investment; Risk judgments; Ambiguity; Familiarity bias; Home bias (search for similar items in EconPapers)
Date: 2021
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Citations: View citations in EconPapers (1)

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Persistent link: https://EconPapers.repec.org/RePEc:eee:joepsy:v:83:y:2021:i:c:s016748702030115x

DOI: 10.1016/j.joep.2020.102358

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