Entropy and the Value of Information for Investors
American Economic Review
vol. 103,
no. 1, February 2013
(pp. 360-77)
Abstract
Consider an investor who fears ruin when facing investments that satisfy no-arbitrage. Before investing he can purchase information about the state of nature as an information structure. Given his prior, information structure α investment dominates information structure β if, whenever he is willing to buy β at some price, he is also willing to buy α at that price. We show that this informativeness ordering is complete and is represented by the decrease in entropy of his beliefs, regardless of his preferences, initial wealth, or investment problem. We also show that no prior-independent informativeness ordering based on similar premises exists. (JEL D14, D81, D83, G11)Citation
Cabrales, Antonio, Olivier Gossner, and Roberto Serrano. 2013. "Entropy and the Value of Information for Investors." American Economic Review, 103 (1): 360-77. DOI: 10.1257/aer.103.1.360Additional Materials
JEL Classification
- D14 Personal Finance
- D81 Criteria for Decision-Making under Risk and Uncertainty
- D83 Search; Learning; Information and Knowledge; Communication; Belief
- G11 Portfolio Choice; Investment Decisions