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Cabrales, Antonio,
Olivier Gossner, and
Roberto Serrano. 2013. "Entropy and the Value of Information for Investors."
,
103(1): 360-77.
Show Article Details
DOI: 10.1257/aer.103.1.360
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)
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Authors:
Cabrales, Antonio (U Carlos III de Madrid)
Gossner, Olivier (Paris School of Economics and London School of Economics and Political Science)
Serrano, Roberto (Brown U)
JEL Classifications:
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
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