Making inflexible investment decisions with incomplete information

✍ Scribed by Jeffrey A. Mills

• Publisher: Elsevier Science
• Year: 1992
• Tongue: English
• Weight: 817 KB
• Volume: 24
• Category: Article
• ISSN: 0898-1221
• DOI: 10.1016/0898-1221(92)90202-s

✦ Synopsis

AbstractwThis paper presents an application of the Principle of Maximum Entropy to b,,alne~ investment decision making under uncertainty. This principle is derived explicitly from a set of axioms for rational infenmce, one of these axioms being the weak form rational expectations hypothesis (REH): that agents use all the available information efficiently. This set of Mam'aptiona are weaker than those embedded in the strong REH. It is demonstrated that the Maxent algorithm leads to rational decision solutiona when the information set available to agents is very limited--so limited that there is no orthodox solution to the problem. Thus, we obtain a solution without the extreme informational assumptions necessary to obtain a strong REH solution.

I would llke to expre~ my gratitude to Peter Faynzilberg, Peter Ferderer, Kevln P,~ffett, Kidaya Prasad and an anonymous referee for subetantial comments that led to considerable improvements in the paper. I r,~m,dn solely responsible for all errors and omi~;ous.