Entropy and the value of information for investors
AbstractConsider any investor who fears ruin facing any set of investments that satisfy no-arbitrage. Before investing, he can purchase information about the state of nature in the form of an information structure. Given his prior, information structure alpha is more informative than information structure beta if whenever he rejects alpha at some price, he also rejects beta at that price. We show that this complete informativeness ordering is represented by the decrease in entropy of his beliefs, regardless of his preferences, initial wealth or investment problem. It is also shown that no prior-independent informativeness ordering based on similar premises exists.
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Bibliographic InfoPaper provided by Instituto Madrileño de Estudios Avanzados (IMDEA) Ciencias Sociales in its series Working Papers with number 2010-23.
Date of creation: 06 Dec 2010
Date of revision:
Publication status: Forthcoming in American Economic Review
informativeness; information structures; entropy; decision under uncertainty; investment; Blackwell ordering;
Other versions of this item:
- Antonio Cabrales & Olivier Gossner & Roberto Serrano, 2013. "Entropy and the Value of Information for Investors," American Economic Review, American Economic Association, vol. 103(1), pages 360-77, February.
- Antonio Cabrales & Olivier Gossner & Roberto Serrano, 2011. "Entropy and the value of information for investors," Economics Working Papers we1104, Universidad Carlos III, Departamento de Economía.
- Antonio Cabrales & Olivier Gossner & Roberto Serrano, 2010. "Entropy and the value of information for investors," Working Papers 2010-17, Brown University, Department of Economics.
- Antonio Cabrales & Olivier Gossner & Roberto Serrano, 2011. "Entropy and the value of information for investors," PSE Working Papers halshs-00648884, HAL.
- Antonio Cabrales & Olivier Gossner & Roberto Serrano, 2010. "Entropy and the value of information for investors," Levine's Working Paper Archive 661465000000000355, David K. Levine.
- C00 - Mathematical and Quantitative Methods - - General - - - General
- C43 - Mathematical and Quantitative Methods - - Econometric and Statistical Methods: Special Topics - - - Index Numbers and Aggregation
- D00 - Microeconomics - - General - - - General
- D80 - Microeconomics - - Information, Knowledge, and Uncertainty - - - General
- D81 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Criteria for Decision-Making under Risk and Uncertainty
- G00 - Financial Economics - - General - - - General
- G11 - Financial Economics - - General Financial Markets - - - Portfolio Choice; Investment Decisions
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