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Entropy and the Value of Information for Investors

Listed author(s):
  • Antonio Cabrales

    ()

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

  • Olivier Gossner

    (PSE - Paris-Jourdan Sciences Economiques - ENS Paris - École normale supérieure - Paris - 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, LSE - London School of Economics and Political Science)

  • Roberto Serrano

    (Department of Economics - Brown University)

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.

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Paper provided by HAL in its series PSE - Labex "OSE-Ouvrir la Science Economique" with number hal-00812682.

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Date of creation: Feb 2013
Publication status: Published in American Economic Review, American Economic Association, 2013, pp.360-377. 〈10.1257/aer.103.1.360〉
Handle: RePEc:hal:pseose: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
Contact details of provider: Web page: https://hal.archives-ouvertes.fr/

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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 & Penélope Hernández & Abraham Neyman, 2006. "Optimal Use of Communication Resources," Econometrica, Econometric Society, vol. 74(6), pages 1603-1636, November.
  3. Mas-Colell, Andreu & Whinston, Michael D. & Green, Jerry R., 1995. "Microeconomic Theory," OUP Catalogue, Oxford University Press, number 9780195102680.
  4. Dean P. Foster & Sergiu Hart, 2009. "An Operational Measure of Riskiness," Journal of Political Economy, University of Chicago Press, vol. 117(5), pages 785-814.
  5. Charles A. Holt & Susan K. Laury, 2002. "Risk Aversion and Incentive Effects," American Economic Review, American Economic Association, vol. 92(5), pages 1644-1655, December.
  6. Azrieli, Yaron & Lehrer, Ehud, 2008. "The value of a stochastic information structure," Games and Economic Behavior, Elsevier, vol. 63(2), pages 679-693, July.
  7. Sergiu Hart, 2011. "Comparing Risks by Acceptance and Rejection," Journal of Political Economy, University of Chicago Press, vol. 119(4), pages 617-638.
  8. 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.
  9. Olivier Gossner, 2011. "Simple Bounds on the Value of a Reputation," Econometrica, Econometric Society, vol. 79(5), pages 1627-1641, 09.
  10. Olivier Gossner & Tristan Tomala, 2006. "Empirical Distributions of Beliefs Under Imperfect Observation," Mathematics of Operations Research, INFORMS, vol. 31(1), pages 13-30, February.
  11. Blume, Lawrence & Easley, David, 1992. "Evolution and market behavior," Journal of Economic Theory, Elsevier, vol. 58(1), pages 9-40, October.
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