Information Acquisition and Under-Diversification

37 Pages Posted: 21 Mar 2008 Last revised: 30 Dec 2022

See all articles by Stijn Van Nieuwerburgh

Stijn Van Nieuwerburgh

Columbia University Graduate School of Business; National Bureau of Economic Research (NBER); Centre for Economic Policy Research (CEPR); ABFER

Laura Veldkamp

Columbia University - Columbia Business School; National Bureau of Economic Research (NBER)

Multiple version iconThere are 3 versions of this paper

Date Written: March 2008

Abstract

If an investor wants to form a portfolio of risky assets and can exert effort to collect information on the future value of these assets before he invests, which assets should he learn about? The best assets to acquire information about are ones the investor expects to hold. But the assets the investor holds depend on the information he observes. We build a framework to solve jointly for investment and information choices, with a variety of preferences and information cost functions. Although the optimal research strategies depend on preferences and costs, the main result is that the investor who can first collect information systematically deviates from holding a diversified portfolio. Information acquisition can rationalize investing in a diversified fund and a concentrated set of assets, an allocation often observed, but usually deemed anomalous.

Suggested Citation

Van Nieuwerburgh, Stijn and Veldkamp, Laura, Information Acquisition and Under-Diversification (March 2008). NBER Working Paper No. w13904, Available at SSRN: https://ssrn.com/abstract=1112016

Stijn Van Nieuwerburgh (Contact Author)

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Laura Veldkamp

Columbia University - Columbia Business School ( email )

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National Bureau of Economic Research (NBER)

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