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Entropy and the Value of Information for Investors

Author

Listed:
  • Antonio Cabrales

    (Departamento de Economía - UC3M - Universidad Carlos III de Madrid [Madrid])

  • Olivier Gossner

    (PSE - Paris-Jourdan Sciences Economiques - ENS Paris - École normale supérieure - Paris - PSL - Université Paris sciences et lettres - INRA - Institut National de la Recherche Agronomique - EHESS - École des hautes études en sciences sociales - ENPC - École des Ponts ParisTech - CNRS - Centre National de la Recherche Scientifique, PSE - Paris School of Economics - ENPC - École des Ponts ParisTech - ENS Paris - École normale supérieure - Paris - PSL - Université Paris sciences et lettres - UP1 - Université Paris 1 Panthéon-Sorbonne - CNRS - Centre National de la Recherche Scientifique - EHESS - École des hautes études en sciences sociales - INRAE - Institut National de Recherche pour l’Agriculture, l’Alimentation et l’Environnement, LSE - London School of Economics and Political Science)

  • Roberto Serrano

    (Department of Economics - Brown University)

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.

Suggested Citation

  • Antonio Cabrales & Olivier Gossner & Roberto Serrano, 2013. "Entropy and the Value of Information for Investors," Post-Print hal-00812682, HAL.
  • Handle: RePEc:hal:journl:hal-00812682
    DOI: 10.1257/aer.103.1.360
    Note: View the original document on HAL open archive server: https://hal-pjse.archives-ouvertes.fr/hal-00812682
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    References listed on IDEAS

    as
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    More about this item

    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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