We study decision making informed by data. We examine the relation between objective information provided by data and decision maker's beliefs about uncertain outcomes. We also study the evaluation of information by economic agents. We then apply the derived theoretical insights to models of technological adaptation to climate change and to a study of market participation and market structure.
We start by providing a representation of preferences when decisions are informed by data. The representation captures the idea that information from data is perceived as ambiguous. We identify the decision maker's beliefs which combine the objective information in the data (frequency, number and type of observations) with the decision maker's subjective characteristics (perception of similarity and perception of ambiguity). We determine the decision maker's degrees of optimism and pessimism and relate them to his preferences for precision of information. This allows us to derive the value of information.
Next, we apply the representation to a model of technological adaptation in response to a change in climate conditions. We study the role of agent heterogeneity in the process of adoption. By experimenting with new technologies, optimists provide the public good of information, but also obtain lower average returns. Pessimists use this information to choose the optimal technology in the long-run. When the share of optimists is low, steady states are inefficient. We study the impact of subsidies for early adopters and provision of additional information on successful adoption.
The representation is also used to model market participation decisions when markets differ w.r.t. the quality of information they provide. Agents self-select into markets based on their preferences for information precision. This leads to distinct dynamics of prices and allocations in markets providing different information. We study implications for the regulation of information provision in markets.
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