TY - JOUR
T1 - Entropy and the value of information for investors
AU - Cabrales, Antonio
AU - Gossner, Olivier
AU - Serrano, Roberto
PY - 2013/2
Y1 - 2013/2
N2 - 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.
AB - 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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U2 - 10.1257/aer.103.1.360
DO - 10.1257/aer.103.1.360
M3 - Article
AN - SCOPUS:84873297965
SN - 0002-8282
VL - 103
SP - 360
EP - 377
JO - American Economic Review
JF - American Economic Review
IS - 1
ER -