Investment Decisions and Falling Cost of Data Analytics
67 Pages Posted: 17 Mar 2018 Last revised: 2 Dec 2018
Date Written: December 2, 2018
We model a risk-averse decision maker who optimizes the size of an investment, leverage used in the investment, and the level of information on the investment through costly data analytics. We show that borrowing-constrained or highly risk-averse investors have low demand for data analytics. We also show that the demand of data analytics is highest for investment opportunities with high expected returns, and the demand of data analytics is lumpy for opportunities with low expected returns even without analytics fixed cost. Furthermore, the falling marginal cost of data analytics raises investors' leverage, which leads to higher losses during crises.
Keywords: information, analytics, investment, leverage, demand curve
JEL Classification: D81, D83, G11
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