Entropy and the Value of Information for Investors

Abstract

Consider any investor who fears ruin facing any set of investments that satisfy no-arbitrage. Before investing, he can purchase information about the state of nature in the form of an information structure. Given his prior, information structure is more informative than information structure if whenever he rejects at some price, he also rejects at that price. We show that this complete informativeness ordering is represented by the decrease in entropy of his beliefs, regardless of his preferences, initial wealth or investment problem. It is also shown that no prior-independent informativeness ordering based on similar premises exists.

Keywords: informativeness, information structures, entropy, decision under

JEL Classification: C00, C43, D00, D80, D81, G00, G11