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Better may be worse: Some monotonicity results and paradoxes in discrete choice under uncertainty
KTH, School of Architecture and the Built Environment (ABE), Transport and Economics (closed 20110301), Transport and Location Analysis (closed 20110301).ORCID iD: 0000-0001-9507-9185
2007 (English)In: Theory and Decision, ISSN 0040-5833, E-ISSN 1573-7187, Vol. 63, no 2, 121-151 p.Article in journal (Refereed) Published
Abstract [en]

It is not unusual in real-life that one has to choose among finitely many alternatives when the merit of each alternative is not perfectly known. Instead of observing the actual utilities of the alternatives at hand, one typically observes more or less precise signals that are positively correlated with these utilities. In addition, the decision-maker may, at some cost or disutility of effort, choose to increase the precision of these signals, for example by way of a careful study or the hiring of expertise. We here develop a model of such decision problems. We begin by showing that a version of the monotone likelihood-ratio property is sufficient, and also essentially necessary, for the optimality of the heuristic decision rule to always choose the alternative with the highest signal. Second, we show that it is not always advantageous to face alternatives with higher utilities, a non-monotonicity result that holds even if the decision-maker optimally chooses the signal precision. We finally establish an operational first-order condition for the optimal precision level in a canonical class of decision-problems, and we show that the optimal precision level may be discontinuous in the precision cost.

Place, publisher, year, edition, pages
Springer , 2007. Vol. 63, no 2, 121-151 p.
Keyword [en]
decision, theory, discrete, choice, monotonicity, uncertainty
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URN: urn:nbn:se:kth:diva-9962DOI: 10.1007/s11238-007-9041-7ISI: 000248330000002ScopusID: 2-s2.0-34547236489OAI: diva2:173569

QC 20150720

Available from: 2009-02-20 Created: 2009-02-16 Last updated: 2015-07-20Bibliographically approved

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Mattsson, Lars-Göran
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Transport and Location Analysis (closed 20110301)
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