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Ambgiuity, Data and Preferences for Information - Theory and Applications

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Ambiguity and decision making

An EU team studied the connection between realistic information and economic choice processes. The study compared optimistic and pessimistic consumers and their respective market survival rates given conditions of vagueness.

Digital Economy

Most people prefer certainty to uncertainty. Yet, it is unclear whether objective data helps people overcome their prior beliefs and make better decisions. The EU-funded AMBIGUITY AND DATA (Ambiguity, data and preferences for information - Theory and applications) project planned to find out. The team also considered how economic agents evaluate information. The purpose was to revise models of market participation and structure in the case of technological adaptation to climate change. Work began with representing preferences when decisions are informed by data. The representation reflected a perception of data being ambiguous. The study examined decision makers' beliefs in combination with objective data, compared against individuals' characteristics. Comparisons included degree of optimism or pessimism and preferences for information precision. This stage thus yielded the value of information. Researchers applied the results to a model of technological adaptation in response to climate change. Findings suggest that optimists, by experimenting with new technologies, provide information, yet also gain lower average returns. On the other hand, pessimists use information to choose optimal technology. Where the share of optimists is low, steady states are more efficient. The project assessed the impact of subsidies for early adopters and the resulting additional information. The investigation analysed the long-term market persistence of ambiguity-adverse consumers. If ambiguity lessens with time, or the economy shows little risk, such consumers survive, but do not affect prices. Either way, such consumers are insured against ambiguity equilibrium, and behave like informed consumers. Yet, where ambiguity-adverse consumers are not fully insured against ambiguity, they behave like incorrectly informed consumers. In such cases, they gain an improper discount factor. Given a Markov economy with high ambiguity, such consumers survive at the expense of correctly informed individuals. Results from the AMBIGUITY AND DATA project contribute to the refinement of economic models involving the relationship between decision making and ambiguity.

Keywords

Ambiguity, decision making, certainty, data, climate change, economic models

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