The Informational Theory of Investment: A Comparison with Behavioral Theories
University of Northern British Columbia - School of Business
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.
Number of Pages in PDF File: 31
Keywords: information, behavioral finance, entropy, human mind, psychology
JEL Classification: G14
Date posted: March 20, 2003