Variance and the value of information

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134 Scopus citations

Abstract

A simple way to approximate the value of information is proposed. Two kinds of quantities are important in determining the value of information: 1) the optimal behaviors that would be chosen if the decision maker knew which subtype (or state) of the resource it faced; and 2) the costs of small deviations from these subtype optima. The value of information is approximately equal to the product of the mean cost of small deviations from the subtype optima and the variance of a modified distribution of the optimal behaviors. This helps to resolve the conflict between a result from economics, which shows that the value of information does not increase with the variance of subtypes, and results from theoretical behavioral ecology, which show that the effect of adding incomplete information to "conventional' models is greatest when the variance of subtypes is greatest. There is no conflict as long as an increase in the variance of subtypes results in an increase in the variance of subtype optima, as is often the case. Changes in a problem's payoff structure change the value of information. -from Author

Original languageEnglish (US)
Pages (from-to)128-140
Number of pages13
JournalAmerican Naturalist
Volume134
Issue number1
DOIs
StatePublished - Jan 1 1989

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