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Entropy and the value of information for investors

Cabrales, Antonio and Gossner, Olivier and Serrano, Roberto (2013) Entropy and the value of information for investors. American Economic Review, 103 (1). pp. 360-377. ISSN 0002-8282

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Identification Number: 10.1257/aer.103.1.360

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.

Item Type: Article
Official URL: http://www.aeaweb.org/aer/index.php
Additional Information: © 2013 by the American Economic Association
Subjects: H Social Sciences > HB Economic Theory
Sets: Departments > Mathematics
Date Deposited: 20 Feb 2013 14:37
Last Modified: 17 Jun 2014 14:34
Projects: CONSOLIDER-INGENIO 2010 CSD2006-0016, ECO2009–10531
Funders: Ministry of the Economy and Competitiveness
URI: http://eprints.lse.ac.uk/id/eprint/48772

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