Information Acquisition and Under-Diversification
36 Pages Posted: 16 Nov 2004 Last revised: 17 Mar 2008
Date Written: January 8, 2008
If an investor wants to form a portfolio of risky assets and can exert effort to collect information on the future value of these assets before he invests, which assets should he learn about? The best assets to acquire information about are ones the investor expects to hold. But the assets the investor holds depend on the information he observes. We build a framework to solve jointly for investment and information choices, with a variety of preferences and information cost functions. Although the optimal research strategies depend on preferences and costs, the main result is that the investor who can first collect information systematically deviates from holding a diversified portfolio. Information acquisition can rationalize investing in a diversified fund and a concentrated set of assets, an allocation often observed, but usually deemed anomalous.
Keywords: Information choice, portfolio theory, learning, asymmetric information
JEL Classification: D83, D82, G11
Suggested Citation: Suggested Citation