Information Acquisition and Under-Diversification

36 Pages Posted: 16 Nov 2004 Last revised: 17 Mar 2008

See all articles by Stijn Van Nieuwerburgh

Stijn Van Nieuwerburgh

Columbia University Graduate School of Business; National Bureau of Economic Research (NBER); Centre for Economic Policy Research (CEPR); New York University Stern School of Business, Department of Finance

Laura Veldkamp

New York University - Stern School of Business; National Bureau of Economic Research (NBER)

Multiple version iconThere are 3 versions of this paper

Date Written: January 8, 2008

Abstract

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

Van Nieuwerburgh, Stijn and Veldkamp, Laura, Information Acquisition and Under-Diversification (January 8, 2008). EFA 2005 Moscow Meetings. Available at SSRN: https://ssrn.com/abstract=619362 or http://dx.doi.org/10.2139/ssrn.619362

Stijn Van Nieuwerburgh (Contact Author)

Columbia University Graduate School of Business ( email )

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HOME PAGE: http://https://www0.gsb.columbia.edu/faculty/svannieuwerburgh/

National Bureau of Economic Research (NBER)

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Centre for Economic Policy Research (CEPR)

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New York University Stern School of Business, Department of Finance ( email )

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Laura Veldkamp

New York University - Stern School of Business ( email )

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New York, NY 100012
United States

National Bureau of Economic Research (NBER)

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

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