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Risk Aversion and the Value of Information for Investors

In: Encyclopedia of Finance

Author

Listed:
  • Richard E. Kihlstrom

    (The Wharton School of the University of Pennsylvania)

Abstract

The chapter provides a selective survey of the literature relating risk aversion to the value of information. The focus is on several papers, Cabrales et al. (American Economic Review 103:360–77, 2013; Journal of Economic Theory 170:266–288, 2017) and Losq and Sobti (Demand for information and risk aversion: Some results in a portfolio choice context, unpublished working paper, McGill University, 1985) in which more risk averse investors are shown to put a lower value on information. The intuition for this result suggested by the CARA case considered by Losq and Sobti (Demand for information and risk aversion: Some results in a portfolio choice context, unpublished working paper, McGill University, 1985) is the more conservative investment strategies chosen by highly risk averse investors. The argument used in Losq and Sobti (Demand for information and risk aversion: Some results in a portfolio choice context, unpublished working paper, McGill University, 1985) is quite specific to the CARA case. In Cabrales et al. (American Economic Review 103:360–77, 2013; Journal of Economic Theory 170:266–288, 2017), the result is a consequence of the assumptions that imply uninformed investors bear no risk. When the investor bears no risk, information acquisition is a risky investment. These results are related to a gambling example provided by a 2001 literature survey in Gollier (The economics of risk and time. MIT Press, 2001). The chapter concludes with several CRRA examples that suggest the CARA results can be extended. There is also a digression on the point made in Cabrales et al. (American Economic Review 103:360–77, 2013) on the role of entropy in this literature.

Suggested Citation

  • Richard E. Kihlstrom, 2022. "Risk Aversion and the Value of Information for Investors," Springer Books, in: Cheng-Few Lee & Alice C. Lee (ed.), Encyclopedia of Finance, edition 0, chapter 108, pages 2633-2653, Springer.
    • Handle: RePEc:spr:sprchp:978-3-030-91231-4_111
    DOI: 10.1007/978-3-030-91231-4_111
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    More about this item

    Keywords

    Information value; Risk aversion; Portfolio theory;
    All these keywords.

    JEL classification:

    • C44 - Mathematical and Quantitative Methods - - Econometric and Statistical Methods: Special Topics - - - Operations Research; Statistical Decision Theory
    • D81 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Criteria for Decision-Making under Risk and Uncertainty
    • D83 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Search; Learning; Information and Knowledge; Communication; Belief; Unawareness
    • G11 - Financial Economics - - General Financial Markets - - - Portfolio Choice; Investment Decisions
    • G14 - Financial Economics - - General Financial Markets - - - Information and Market Efficiency; Event Studies; Insider Trading

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