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Entropy and the value of information for investors

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  • Antonio Cabrales
  • Olivier Gossner
  • Roberto Serrano

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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Paper provided by David K. Levine in its series Levine's Working Paper Archive with number 661465000000000355.

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Date of creation: 06 Dec 2010
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Handle: RePEc:cla:levarc:661465000000000355

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  1. Thierry Post & Martijn J. van den Assem & Guido Baltussen & Richard H. Thaler, 2008. "Deal or No Deal? Decision Making under Risk in a Large-Payoff Game Show," American Economic Review, American Economic Association, vol. 98(1), pages 38-71, March.
  2. Olivier Gossner & Abraham Neyman & Penélope Hernández, 2005. "Optimal Use Of Communication Resources," Working Papers. Serie AD 2005-06, Instituto Valenciano de Investigaciones Económicas, S.A. (Ivie).
  3. Blume, Lawrence & Easley, David, 1992. "Evolution and market behavior," Journal of Economic Theory, Elsevier, vol. 58(1), pages 9-40, October.
  4. Sergiu Hart, 2011. "Comparing Risks by Acceptance and Rejection," Journal of Political Economy, University of Chicago Press, vol. 119(4), pages 617 - 638.
  5. Dean P. Foster & Sergiu Hart, 2007. "An Operational Measure of Riskiness," Discussion Paper Series dp454, The Center for the Study of Rationality, Hebrew University, Jerusalem.
  6. Olivier Gossner, 2011. "Simple Bounds on the Value of a Reputation," Econometrica, Econometric Society, vol. 79(5), pages 1627-1641, 09.
  7. Susan Athey & Jonathan Levin, 1998. "The Value of Information In Monotone Decision Problems," Working papers 98-24, Massachusetts Institute of Technology (MIT), Department of Economics.
  8. Mas-Colell, Andreu & Whinston, Michael D. & Green, Jerry R., 1995. "Microeconomic Theory," OUP Catalogue, Oxford University Press, number 9780195102680, September.
  9. Yaron Azrieli & Ehud Lehrer, 2004. "The Value Of A Stochastic Information Structure," Game Theory and Information 0411006, EconWPA.
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Cited by:
  1. Stark, Oded & Jakubek, Marcin & Falniowski, Fryderyk, 2014. "Reconciling the Rawlsian and the utilitarian approaches to the maximization of social welfare," Economics Letters, Elsevier, vol. 122(3), pages 439-444.
  2. Braz Camargo & Kyungmin (Teddy) Kim & Benjamin Lester, 2013. "Subsidizing price discovery," Working Papers 13-20, Federal Reserve Bank of Philadelphia.
  3. Camargo, Braz & Pastorino, Elena, 2012. "Career concerns: A human capital perspective," Textos para discussão 288, Escola de Economia de São Paulo, Getulio Vargas Foundation (Brazil).
  4. Antonio Cabrales & Olivier Gossner & Roberto Serrano, 2012. "The Appeal of Information Transactions," Working Papers 2012-13, Brown University, Department of Economics.

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