Journal Article

Information Acquisition and Under-Diversification

Stijn Van Nieuwerburgh and Laura Veldkamp

in The Review of Economic Studies

Published on behalf of Review of Economic Studies Ltd

Volume 77, issue 2, pages 779-805
Published in print April 2010 | ISSN: 0034-6527
Published online April 2010 | e-ISSN: 1467-937X | DOI: http://dx.doi.org/10.1111/j.1467-937X.2009.00583.x
Information Acquisition and Under-Diversification

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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 general 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.

Journal Article.  12743 words.  Illustrated.

Subjects: Economics

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