The Informational Theory of Investment: A Comparison with Behavioral Theories

31 Pages Posted: 20 Mar 2003  

Jing Chen

University of Northern British Columbia - School of Business

Date Written: September 2006

Abstract

This paper develops a new theory of investment based on a newly developed information theory. This new information theory states that information is the reduction of entropy, not only in a mathematical sense, as in Shannon's theory, but also in a physical sense. The rules of information transmission developed in Shannon's theory, as mathematical rules, apply not only to communication systems, but also to all living organisms, including human beings. We also develop a new theory of learning from this information theory. We then demonstrate that the new information theory provides the foundation to understand major market patterns. Compared with behavioral theories, the assumptions of the informational theory of investment are much simpler and the informational theory can provide much more precise understanding about market behaviors. When predictions from this informational theory and behavioral theory differ, empirical results are consistent with the informational theory.

Keywords: information, behavioral finance, entropy, human mind, psychology

JEL Classification: G14

Suggested Citation

Chen, Jing, The Informational Theory of Investment: A Comparison with Behavioral Theories (September 2006). Available at SSRN: https://ssrn.com/abstract=380460 or http://dx.doi.org/10.2139/ssrn.380460

Jing Chen (Contact Author)

University of Northern British Columbia - School of Business ( email )

Prince George, BC, V2N 4Z9
Canada
250-960-6480 (Phone)
250-960-5544 (Fax)

HOME PAGE: http://web.unbc.ca/~chenj/

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