Abstract
The entry provides a selective survey of the literature relating risk aversion to the value of information. The focus is on several papers, Cabrales et al. (American Economic Review 103:360–77, 2013; Journal of Economic Theory 170:266–288, 2017) and Losq and Sobti (Demand for information and risk aversion: Some results in a portfolio choice context, unpublished working paper, McGill University, 1985) in which more risk averse investors are shown to put a lower value on information. The intuition for this result suggested by the CARA case considered by Losq and Sobti (Demand for information and risk aversion: Some results in a portfolio choice context, unpublished working paper, McGill University, 1985) is the more conservative investment strategies chosen by highly risk averse investors. The argument used in Losq and Sobti (Demand for information and risk aversion: Some results in a portfolio choice context, unpublished working paper, McGill University, 1985) is quite specific to the CARA case. In Cabrales et al. (American Economic Review 103:360–77, 2013; Journal of Economic Theory 170:266–288, 2017), the result is a consequence of the assumptions that imply uninformed investors bear no risk. When the investor bears no risk, information acquisition is a risky investment. These results are related to a gambling example provided by a 2001 literature survey in Gollier (The economics of risk and time. MIT Press, 2001). The entry concludes with several CRRA examples that suggest the CARA results can be extended. There is also a digression on the point made in Cabrales et al. (American Economic Review 103:360–77, 2013) on the role of entropy in this literature.
Similar content being viewed by others
References
Arrow, K. 1965. “Aspects of the Theory of Risk Bearing,” The Theory of Risk Aversion.” Helsinki, Yrjo Johanssonin Saato. Reprinted in Arrow, K. 1971. Essays in the Theory of Risk Bearing, Markham, Chicago. 90–109.
Blackwell, D. 1953. Equivalent comparisons of experiments. Annals of Mathematical Statistics 24: 265–272.
Bonnenblust, Shapley, and Sherman. 1949. Reconnaissance in game theory, unpublished RAND Research Memorandum, RM-208.
Cabrales, A., O. Gossner, and R. Serrano. 2013. Entropy and the value of information for investor. American Economic Review 103: 360–377.
———. 2017. A normalized value for information purchases. Journal of Economic Theory 170: 266–288.
DeGroot, M. 1962. Uncertainty, information and sequential experiments. Annals of Mathematical Statistics 33: 404–419.
Gollier, C. 2001. The economics of risk and time. MIT Press.
Lindley, D.V. 1956. On a measure of the information provided by an experiment. Annals of Mathematical Statistics 27: 986–1005.
Losq, E., and R. Sobti. 1985. Demand for information and risk aversion: Some results in a portfolio choice context, unpublished working paper, McGill University.
Mehra, R., and E. Prescott. 1985. The equity premium puzzle. Journal of Monetary Economics 15: 145–161.
Pratt, J. 1964. Risk aversion in the small and in the large. Econometrica 32: 122–136.
Author information
Authors and Affiliations
Corresponding author
Editor information
Editors and Affiliations
Rights and permissions
Copyright information
© 2021 Springer Nature Switzerland AG
About this entry
Cite this entry
Kihlstrom, R.E. (2021). Risk Aversion and the Value of Information for Investors. In: Lee, CF., Lee, A.C. (eds) Encyclopedia of Finance. Springer, Cham. https://doi.org/10.1007/978-3-030-73443-5_111-1
Download citation
DOI: https://doi.org/10.1007/978-3-030-73443-5_111-1
Received:
Accepted:
Published:
Publisher Name: Springer, Cham
Print ISBN: 978-3-030-73443-5
Online ISBN: 978-3-030-73443-5
eBook Packages: Springer Reference Economics and FinanceReference Module Humanities and Social SciencesReference Module Business, Economics and Social Sciences