Risky Investments under Static and Dynamic Information Acquisition

Abstract

We show that under a dynamic information acquisition process, a risk averse investor's unconditional expected optimal quantity of information and investment amount are higher than those under the corresponding static information acquisition process. However, when the initial belief of the investment payoff is either high or low, static and dynamic information acquisitions provide similar expected results. To incentivize decision makers to acquire information and invest when the initial belief of a risky investment payoff is mediocre, governments and other central planners should allow organizations and individuals to acquire information dynamically. This has implications on, e.g., clinical trials. Furthermore, we show that, especially under dynamic information acquisition mode, investment amount falls in the marginal cost of information.

Keywords: Information acquisition; Investment; Bayesian learning;

JEL Classification: D81, D83, G11