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Entropy and the value of information for investors

Cabrales, Antonio, 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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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
Library of Congress subject classification: H Social Sciences > HB Economic Theory
Sets: Departments > Mathematics
Rights: http://www.lse.ac.uk/library/usingTheLibrary/academicSupport/OA/depositYourResearch.aspx
Date Deposited: 20 Feb 2013 14:37
URL: http://eprints.lse.ac.uk/48772/

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