Effectiveness of Signal Precision and Risky Choice

Abstract

Higher signal precision helps to predict returns more accurately. But higher signal precision requires higher more costs and longer time. The acquisition of higher precision signals has two opposite effects for investors. First, the higher precision helps with return forecast. Second, the longer processing time is a disadvantage for decision making. We build a rational expected model under the assumption that the longer processing time takes, the higher the signal precision. The results show that higher signal precision is not always better after considering signal processing time. There is an optimal signal waiting time for investors.