Entropy and the value of information for investors Articles uri icon

publication date

  • February 2013

start page

  • 360

end page

  • 377

issue

  • 1

volume

  • 103

International Standard Serial Number (ISSN)

  • 0002-8282

Electronic International Standard Serial Number (EISSN)

  • 1944-7981

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 alpha investment dominates information structure beta if, whenever he is willing to buy beta at some price, he is also willing to buy alpha 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. (JEL D14, D81, D83, G11)