Information Gaps for Risk and Ambiguity Russell Golman, George Loewenstein, and Nikolos Gurney∗ May 6, 2015 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 ambi- guity. Yet when an information gap happens to be pleasant, an individual may seek gambles providing exposure to it. The model provides explanations for source preference regarding uncertainty, the comparative ignorance effect under conditions of ambiguity, aversion to compound risk, and other phenomena. We present an empirical test of one of the model’s novel predictions. KEYWORDS: ambiguity, gambling, information gap, risk, uncertainty JEL classification code: D81 ∗Department of Social and Decision Sciences, Carnegie Mellon University, 5000 Forbes Ave, Pittsburgh, PA 15213, USA. E-mail:
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[email protected] 1 1 Introduction In this paper we derive both risk and ambiguity preferences from an underlying model of preferences for information. We argue that risk and ambiguity aversion arise from the dis- comfort of thinking about missing information regarding either outcomes or probabilities. Likewise, risk and ambiguity seeking occur in (rarer) cases in which thinking about the missing information is pleasurable. The main focus of our model is, therefore, on when and how people think about missing information, and the hedonic consequences of doing so.