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Entropy and the value of information for investors

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Abstract

Consider 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 is more informative than information structure if whenever he rejects at some price, he also rejects 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.

Suggested Citation

  • Antonio Cabrales & Olivier Gossner & Roberto Serrano, 2010. "Entropy and the value of information for investors," Working Papers 2010-17, Brown University, Department of Economics.
    • Handle: RePEc:bro:econwp:2010-17
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    JEL classification:

    • 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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