Working Paper: NBER ID: w13904
Authors: Stijn Van Nieuwerburgh; Laura Veldkamp
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 Acquisition; Portfolio Diversification; Investment Behavior
JEL Codes: D82; D83; G11; G14
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| Information acquisition (D83) | Portfolio composition (G11) |
| Investment decisions (G11) | Information acquisition (D83) |
| Information acquisition (D83) | Concentration in portfolio (G11) |
| Portfolio composition (G11) | Optimal research strategies (C90) |