Information Acquisition Decisions Research Articles

The negative value of private information in illiquid markets

In the standard perfectly competitive rational expectations model of information acquisition, the marginal benefit of private information to each trader is always positive. We show that with imperfect competition, characterized by a finite number of traders, the value of private information can be negative, resulting in a zero-information equilibrium even if information is free. This zero-information equilibrium arises when noise-trading volume is sufficiently large that price informativeness is weak, and when noise traders are sufficiently bullish or bearish. Given the evidence suggesting that retail traders behave as noise traders, our findings suggest that retail traders can play a significant role in investors' information-acquisition decisions in financial markets.

Clarity trumps content: An experiment on information acquisition in beauty contests

We study how beauty contest incentives affect information acquisition decisions when players can access multiple information sources. Players can acquire information from two equally informative sources: one source has high clarity (i.e., easy to understand and thus likely to be commonly interpreted) but low content (i.e., less precise to identify the economic state); the other has low clarity but high content. Theory predicts that strong beauty contest incentives lead players to ignore information with low clarity despite its high content. Our experimental results confirm this inattention to low-clarity information. Surprisingly, the inattention is stronger than theoretical prediction. In the beauty contest game, subjects use low-clarity information more than theory predicts. The over-use of low-clarity information at the beauty contest stage generates an endogenous cost at the information acquisition stage. The endogenous cost can lead to the under-acquisition of low-clarity information even when information cost is negligible. Interestingly, we find that the under-acquisition of low-clarity information substantially offsets its over-use in the beauty contest game.

Investors’ Information Acquisition and Firm Financing Decisions: Evidence from a Natural Experiment

Investors’ Information Acquisition and Firm Financing Decisions: Evidence from a Natural Experiment

Sharing Demand Information with Retailer Under Upstream Competition

We analyze demand information sharing collaboration between two manufacturers and a retailer under upstream competition. The manufacturers produce partially substitutable products, which are stocked by the retailer that sells them in the market characterized by random demand. The manufacturers are privately informed about uncertain demand and decide on whether to share this information with the retailer. We show that by not sharing information, a manufacturer ends up distorting its wholesale price upward to signal its private information to the retailer, and under upstream competition, this distortion is propagated to the competing manufacturer. Thus, although a manufacturer’s decision to not share information may benefit or hurt its own profit, this always benefits the competing manufacturer. Under low intensity of competition, signaling-driven distortions exacerbate double marginalization and hurt all parties, whereas under more intense competition, these distortions help manufacturers offset downward pressure on wholesale prices. Thus, in equilibrium similarly informed manufacturers share information in the former case but not in the latter case. Additionally, when manufacturers differ in their information accuracies, only the better-informed manufacturer shares information. The retailer always benefits from both manufacturers sharing information, and its benefits are larger when the better-informed manufacturer shares information. We show existence of a contracting mechanism the retailer can employ to enable information sharing. Finally, we analyze manufacturers’ information acquisition decisions and find that under competition, two manufacturers acquire minimal information so that they are better off not sharing information in the information sharing game. This paper was accepted by Vishal Gaur, operations management.

Information acquisition with advertising threshold effect under manufacturer encroachment in a supply chain

In this paper, we examine the interaction between a retailer’s information acquisition and a manufacturer’s advertising strategies by incorporating the advertising threshold effect under manufacturer encroachment. We elaborate on two acquisition timings, namely, ex ante acquisition and ex post acquisition, depending on whether the retailer makes the information acquisition decision before or after the manufacturer’s advertising decision. We demonstrate that under ex ante acquisition, the retailer’s acquisition incentive and the manufacturer’s optimal advertising level exhibit a non-monotonic relationship with the advertising threshold. Under ex post acquisition, given that the threshold is not too high, the retailer’s acquisition incentive weakly increases with the advertising threshold, and the optimal advertising level is always pushed up by the advertising threshold effect and the acquisition inducing effect. More importantly, the advertising threshold effect does not necessarily hurt (benefit) the manufacturer (retailer), as the information acquisition effect can conditionally alleviate the detrimental effect of the advertising threshold. Moreover, the retailer may prefer either ex ante acquisition or ex post acquisition, depending on the advertising level comparison. By contrast, the manufacturer prefers ex post acquisition only when the acquisition incentive under ex post acquisition is higher than that under ex ante acquisition; otherwise, the manufacturer always weakly prefers ex ante acquisition.

Are Managers Susceptible to the Ostrich Effect?

Using data from an information provider in the cannabis industry, we observe that managers of retail dispensaries appear to suffer from the “ostrich effect”—the selective acquisition of news based on an expectation of the likely hedonic response (e.g., avoiding bad news to avoid psychological discomfort). Managers are more likely to acquire store and product performance information as its expected valence (i.e., its “goodness” versus “badness”) increases and revisit this information more as its actual valence increases. These relations are attenuated when managers can more easily attribute the performance to external factors, suggesting managers intuitively acquire good news they can take credit for and avoid bad news they must internalize. Managers’ information acquisition decisions also appear to have real effects—future product stock-outs are greater when managers avoid the information. Our results suggest that hedonic effects of information influence key information acquisition choices of managers.

Data-Driven Online Recommender Systems with Costly Information Acquisition

In numerous recommender systems, collecting useful information from users is costly, implying that the recommender system has to make active choices by simultaneously learning the observations of the features' states to make useful recommendations to users among available products and services. This paper integrates information acquisition decisions into recommender system. To solve the aforementioned dual learning problem, we propose two different algorithms, namely Sim-OOS and Seq-OOS, where observations are made simultaneously and sequentially, respectively. We prove that both algorithms guarantee a sub linear regret. The developed recommender system can be applied to a variety of real-world applications, including medical informatics, smart transportation, finance, and cyber-security where collecting information before making decisions results in an excessive cost. We validate and evaluate our proposed policies in a medical decision-support system that recommends tests and treatments for breast cancer patients.

Quality information acquisition and ordering decisions with risk aversion

This paper investigates a retailer’s quality information acquisition and ordering decisions in the presence of risk aversion. We formulate a newsvendor model and derive the retailer’s optimal order quantity under two scenarios, one with and one without quality information acquisition, by minimising expected risk based on the CVaR criterion. Then, we compare the optimal ordering quantities and the profits under the two scenarios and discuss the quality information acquisition decision. Our results show that it will be more effective for the retailer to acquire quality information if the retailer exhibits greater risk aversion or the information is more precise; the retailer would order less when she is more risk-averse and the impact of risk aversion would be reduced by quality information acquisition. Interestingly, the retailer’s profits may decrease even when the quality information is more precise.

THE IMPORTANCE OF WEB SITE IN THE PREFERENCE OF TOURIST PRODUCTS

Tourism is also one of the important sectors where information and communication technologies are used extensively. Recent studies show that the internet has become one of the most important sources of travel information acquisition and travel decision making. The revolutionary development of information technology has dramatically changed the daily lives of society and people, including the search for information and vacation planning by tourists. Nowadays web sites have become an environment where businesses not only keep their products and services but also draw more customers by attracting more customers. It has become an environment where an important stakeholder in the tourism sector constitutes an important part of the tourism industry. site use is of great importance. Through its web sites, potential customers accommodation businesses that can meet their queries and requests and that fulfill their direct booking requests in the most appropriate, fastest and safest manner will increase the chances of competition in the market.

Information Seeking Behaviors and Intentions in Response to Environmental Health Risk Messages: A Test of A Reduced Risk Information Seeking Model

ABSTRACT This study tests the effects of environmental health risk messages on perceived risk, information needs and decisions to seek information, testing a reduced risk information seeking and processing model (R-RISP). Participants (N = 1,823) were randomized to one of three risk conditions (arsenic, bisphenol A [BPA] or volatile organic compounds [VOCs]) and one of the three message conditions (high threat, low threat or no message); participants in the high and low threat message conditions were also randomly assigned to a seeking cue to action condition (with or without seeking cue). Overall, the results support the R-RISP model, demonstrating the importance of current knowledge perceptions and informational subjective norms in information acquisition decisions. In addition, the results also provide initial evidence that environmental health risk messages can prompt information seeking and increase intentions to seek information in the future. Avenues for future research are discussed.

Descriptive Models of Sequential Decisions in Engineering Design: An Experimental Study

Abstract Engineering design involves information acquisition decisions such as selecting designs in the design space for testing, selecting information sources, and deciding when to stop design exploration. Existing literature has established normative models for these decisions, but there is lack of knowledge about how human designers make these decisions and which strategies they use. This knowledge is important for accurately modeling design decisions, identifying sources of inefficiencies, and improving the design process. Therefore, the primary objective in this study is to identify models that provide the best description of a designer’s information acquisition decisions when multiple information sources are present and the total budget is limited. We conduct a controlled human subject experiment with two independent variables: the amount of fixed budget and the monetary incentive proportional to the saved budget. By using the experimental observations, we perform Bayesian model comparison on various simple heuristic models and expected utility (EU)-based models. As expected, the subjects’ decisions are better represented by the heuristic models than the EU-based models. While the EU-based models result in better net payoff, the heuristic models used by the subjects generate better design performance. The net payoff using heuristic models is closer to the EU-based models in experimental treatments where the budget is low and there is incentive for saving the budget. This indicates the potential for nudging designers’ decisions toward maximizing the net payoff by setting the fixed budget at low values and providing monetary incentives proportional to saved budget.

The Effect of Voluntary Disclosure on Investment Inefficiency

ABSTRACT We introduce real decisions (a project choice decision, an investment scale decision, and an information acquisition decision) to the Dye (1985) voluntary disclosure framework and examine how the prospect of voluntary disclosure affects managers' real decisions. Riskier projects lead to more volatile environment and hence entail higher efficiency loss at the subsequent investment scale decision stage if managers are uninformed. If managers are informed, they can withhold bad information, and the value of this option is higher for riskier projects. We show that the voluntary nature of managers' disclosure may lead to two types of inefficiencies: (1) managers may choose riskier projects, which generate lower expected cash flow due to the higher efficiency loss at the subsequent decision stage, and (2) managers may over-invest in information acquisition, because informed managers with bad information have the option to pool with uninformed managers and benefit from being overpriced.

Stock Market Rumors and Credibility

Abstract Stock prices occasionally move in response to unverified rumors. I propose a cheap talk model in which a rumormonger’s incentives to tell the truth depend on the interaction between her investment horizon and the information acquisition decisions of message-receiving investors. The model’s key prediction is that short investment horizons can facilitate credible information sharing between investors, thereby accelerating the information capitalization into market prices. Analyzing a data set of takeover rumors covered by U.S. newspapers, I find suggestive evidence in support of this prediction. Authors have furnished an Internet Appendix, which is available on the Oxford University Press Web site next to the link to the final published paper online.

Sharing Demand Information with Retailer Under Upstream Competition

We analyze demand information sharing collaboration between two manufacturers and a retailer under upstream competition. The manufacturers produce partially substitutable products, which are stocked by the retailer who sells them in the market characterized by random demand. The manufacturers are privately informed about uncertain demand, and decide on whether to share this information with the retailer. We show that by not sharing information a manufacturer ends up distorting its wholesale price upwards to signal its private information to the retailer, and under upstream competition this distortion is propagated to the competing manufacturer. Thus, while a manufacturer's decision to not share information may benefit or hurt its own profit, this always benefits the competing manufacturer. Under low intensity of competition, signaling driven distortions exacerbate double marginalization and hurt all parties, whereas under more intense competition, these distortions help manufacturers offset downward pressure on wholesale prices. Thus, in equilibrium similarly informed manufacturers share information in the former case, but not in the latter case. And when manufacturers differ in their information accuracies, only the better-informed manufacturer shares information. The retailer always benefits from both manufacturers sharing information, and its benefits are larger when the better-informed manufacturer shares information. We show existence of a contracting mechanism the retailer can employ to enable information sharing. Finally, we analyze manufacturers' information acquisition decisions, and find that under competition two manufacturers acquire minimal information so that they are better off not sharing information in the information sharing game.

Welfare Effects of Endogenous Information Acquisition and Disclosure in Duopoly Markets

This paper investigates the interaction between firms' information acquisition decisions and disclosure of internally acquired information in a Cournot duopoly market under demand uncertainty. The main results are as follows. When the correlation between firms' demands is positive and sufficiently high, disclosure of information on demand uncertainty can enhance social welfare, given that the quality of firms' private information is constant. However, in the setting where firms' private information is endogenously determined, mandatory disclosure is not always desirable. This is because, when disclosure is mandated, firms acquire less precise information compared with the case where the acquired information is not disclosed; hence, their internal information environments are deteriorated. This can lead to unintended consequences such that disclosure regulation decreases social welfare.

Welfare Effects of Endogenous Information Acquisition and Disclosure in Duopoly Markets

This paper investigates the interaction between firms' information acquisition decisions and disclosure of internally acquired information in a Cournot duopoly market under demand uncertainty. The main results are as follows. When the correlation between firms' demands is positive and sufficiently high, disclosure of information on demand uncertainty can enhance social welfare, given that the quality of firms' private information is constant. However, in the setting where firms' private information is endogenously determined, mandatory disclosure is not always desirable. This is because, when disclosure is mandated, firms acquire less precise information compared with the case where the acquired information is not disclosed; hence, their internal information environments are deteriorated. This can lead to unintended consequences such that disclosure regulation decreases social welfare.

In Defense of Limited Manufacturing Cost Control: Disciplining Acquisition of Private Information by Suppliers

When a firm’s input supplier can acquire private information to gain an edge in negotiations, we show that the firm can blunt the supplier’s informational advantage by permitting cost inefficiencies in internal production. Specifically, we establish that a modest increase in the cost of the input(s) a firm makes internally credibly commits it to be more aggressive in negotiations with a supplier for the input(s) it buys. Recognizing its potential information rents will be limited, the supplier, in turn, becomes less aggressive in information acquisition. The paper fully characterizes the equilibrium – the firm’s cost-cutting investments, the supplier’s information acquisition decision, and the terms of trade – to demonstrate that often-maligned internal bloat can be an endogenous facilitator of efficient outsourcing.

Clarity Trumps Content: An Experiment on Information Acquisition in Beauty Contests

We study agents' information acquisition decisions in a beauty contest game when they can access multiple information sources with different content and clarity. Each information source sends a signal with a common noise, and each agent observes this signal with an additional idiosyncratic noise. An information source has high content if it has low common noise and high clarity if it has low idiosyncratic noise. Theory predicts that under strong beauty contest incentives, agents ignore information from a source with high content if it has low clarity. Instead, they acquire equally costly information from a source with higher clarity despite its lower content. Our experimental results confirm the directional predictions; however the under-acquisition of the less-clear source is more severe than theoretical predictions. A source with low clarity is ignored even when its cost is negligible. Our findings provide a new strategic perspective to explain the differential impacts of content and clarity in corporate disclosures.

Information Acquisition and Technology Adoption in a Partnership

We study information acquisition and technology adoption decisions in a partnership. Using classical information acquisition and technology adoption results for a single decision-maker (SDM policy; McCardle 1985) as a benchmark, we establish that it could be optimal for the partnership to prematurely adopt/reject the technology. Furthermore, anticipating premature decisions in a later period could trigger unraveling which leads to a series of premature decisions in earlier periods. Finally, for a given precision of the partnership’s belief of the success probability of the technology, the structure of the optimal policy may be non-monotonic in the belief, due to the non-convexity and discontinuity of the associated coupled optimization problem. Thus, the presence of a partner may have a non-trivial and profound impact on the prescribed optimal information acquisition and technology adoption decisions.

Quantifying the Impact of Domain Knowledge and Problem Framing on Sequential Decisions in Engineering Design

Many decisions within engineering systems design are typically made by humans. These decisions significantly affect the design outcomes and the resources used within design processes. While decision theory is increasingly being used from a normative standpoint to develop computational methods for engineering design, there is still a significant gap in our understanding of how humans make decisions within the design process. Particularly, there is lack of knowledge about how an individual's domain knowledge and framing of the design problem affect information acquisition decisions. To address this gap, the objective of this paper is to quantify the impact of a designer's domain knowledge and problem framing on their information acquisition decisions and the corresponding design outcomes. The objective is achieved by (i) developing a descriptive model of information acquisition decisions, based on an optimal one-step look ahead sequential strategy, utilizing expected improvement maximization, and (ii) using the model in conjunction with a controlled behavioral experiment. The domain knowledge of an individual is measured in the experiment using a concept inventory, whereas the problem framing is controlled as a treatment variable in the experiment. A design optimization problem is framed in two different ways: a domain-specific track design problem and a domain-independent function optimization problem (FOP). The results indicate that when the problem is framed as a domain-specific design task, the design solutions are better and individuals have a better state of knowledge about the problem, as compared to the domain-independent task. The design solutions are found to be better when individuals have a higher knowledge of the domain and they follow the modeled strategy closely.