Rationalizing the Ostriches: Prior-Dependent Information Attitudes and Prior-Dependent Utility Theory

Abstract

Empirical evidence shows that non-instrumental information attitudes are generally prior-dependent. However, Eliaz and Spiegler (2006) show that that such an anomalous information attitude cannot be captured by “expected utility-based models” and a potential way to fix this problem is replacing them by prior-dependent utility. This paper provides a systematic analysis of the prior-dependent utility approach as the explanation of prior-dependent information attitudes. First, the axiomatic system of this type of utility functions is studied, and I show that the representation theorem can be derived from extending the lottery-dependent utility theory (Schmidt, 2001) to the setting of temporal lotteries. Second, an alternative way to prior-dependent utility maximization is provided, where the decision maker chooses the prior belief and the temporal structure of information in a separate and sequential manner. Based on this interpretation, an anticipatory emotion-based explanation to the “ostrich effect”, one of the most common pattern of prior-dependent information attitude, is introduced.