Entropy and the value of information for investors
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 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.
|Date of creation:||06 Dec 2010|
|Publication status:||Forthcoming in American Economic Review|
|Contact details of provider:|| Postal: Veláquez 76, 28001 Madrid|
Web page: http://www.cienciassociales.imdea.org/
More information through EDIRC
References listed on IDEAS
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
- Sergiu Hart, 2010.
"Comparing Risks by Acceptance and Rejection,"
Discussion Paper Series
dp531, The Federmann Center for the Study of Rationality, the Hebrew University, Jerusalem.
- 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.
- Olivier Gossner, 2011.
"Simple bounds on the value of a reputation,"
- 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).
- Olivier Gossner & Pénélope Hernández & Abraham Neyman, 2006. "Optimal use of communication resources," Post-Print halshs-00754118, HAL.
- Olivier Gossner & Penelope Hernandez & Abraham Neyman, 2004. "Optimal Use of Communication Resources," Discussion Paper Series dp377, The Federmann Center for the Study of Rationality, the Hebrew University, Jerusalem.
- Blume, Lawrence & Easley, David, 1992. "Evolution and market behavior," Journal of Economic Theory, Elsevier, vol. 58(1), pages 9-40, October.
- Yaron Azrieli & Ehud Lehrer, 2004.
"The Value Of A Stochastic Information Structure,"
Game Theory and Information
- Dean Foster & Sergiu Hart, 2007.
"An Operational Measure of Riskiness,"
843644000000000095, UCLA Department of Economics.
- 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.
- Olivier Gossner & Tristan Tomala, 2006. "Empirical Distributions of Beliefs Under Imperfect Observation," Post-Print hal-00487960, HAL.
- Mas-Colell, Andreu & Whinston, Michael D. & Green, Jerry R., 1995. "Microeconomic Theory," OUP Catalogue, Oxford University Press, number 9780195102680, December.
- Susan Athey & Jonathan Levin, 1998.
"The Value of Information In Monotone Decision Problems,"
98-24, Massachusetts Institute of Technology (MIT), Department of Economics.
- Jonathan Levin & Susan Athey, 2001. "The Value of Information in Monotone Decision Problems," Working Papers 01003, Stanford University, Department of Economics.
When requesting a correction, please mention this item's handle: RePEc:imd:wpaper:wp2010-23. See general information about how to correct material in RePEc.
For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (IMDEA RePEc Maintainer)
If references are entirely missing, you can add them using this form.