Risky Investments under Static and Dynamic Information Acquisition

55 Pages Posted: 17 Mar 2018 Last revised: 18 Mar 2025

See all articles by Jussi Keppo

Jussi Keppo

National University of Singapore (NUS) - NUS Business School

Tianyue Shao

National University Singapore

Hong Ming Tan

National University of Singapore (NUS) - NUS Business School

Chao Zhou

National University of Singapore (NUS) - Department of Mathematics

Date Written: March 16, 2025

Abstract

This paper examines the trade-offs between static and dynamic information acquisition in risky investments, with a focus on clinical trials. In a stylized model, a risk-averse decision maker with a Constant Absolute Risk Aversion (CARA) utility function gathers costly data before choosing an investment level. Under a static approach, information acquisition is fixed in advance; under a dynamic approach, data collection can continue or stop based on interim outcomes. Our analysis reveals three main findings. First, falling marginal costs of information lead to increased data collection, which raises average investment but can also amplify losses in adverse states. Second, allowing for dynamic sampling typically results in higher expected information acquisition and investment than a static design, especially when prior beliefs about the investment’s returns are neither too optimistic nor too pessimistic. Finally, somewhat counterintuitively, less risk-averse decision makers acquire more information because they invest more in the underlying project, making refined forecasts more valuable. These insights highlights the managerial advantages of flexible sampling schemes in settings like vaccine development, while offering guidance for policymakers regulating data collection in high-stakes industries.

Keywords: Information acquisition; Investment; Bayesian learning;, Bayesian learning, Investment

JEL Classification: D81, D83, G11

Suggested Citation

Keppo, Jussi and Shao, Tianyue and Tan, Hong Ming and Zhou, Chao, Risky Investments under Static and Dynamic Information Acquisition (March 16, 2025). Available at SSRN: https://ssrn.com/abstract=3141043 or http://dx.doi.org/10.2139/ssrn.3141043

Jussi Keppo (Contact Author)

National University of Singapore (NUS) - NUS Business School ( email )

Mochtar Riady Building
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HOME PAGE: http://https://www.jussikeppo.com

Tianyue Shao

National University Singapore ( email )

Hong Ming Tan

National University of Singapore (NUS) - NUS Business School ( email )

1 Business Link
Singapore, 117592
Singapore

Chao Zhou

National University of Singapore (NUS) - Department of Mathematics ( email )

Department of Mathematics
Singapore, 117543
Singapore

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