The meaning of information is precisely a reduction in uncertainty. From the viewpoint of economics or decision theory, uncertainty is relevant becau… - Kenneth Arrow

There is no need to enlarge upon the importance of a realistic theory explaining how individuals choose among alternate courses of action when the consequences of their actions are incompletely known to them. It is no exaggeration to say that every choice made by human beings would meet this description if attention were paid to the ultimate implications.

Any argument seeking to establish the presence of irrational economic behavior always meets a standard counterargument: if most agents are irrational, then a rational individual can make a lot of money; eventually, therefore, the rational individuals will take over all the wealth. Hence, rational behavior will be the effective norm. There are two rebuttals to the counterargument. (1) Not all arbitrage possibilities exist. For example, corporate profits, even though they may be down, are very distinctly positive in real terms after all necessary adjustments, including taxes. Yet there seems no way by which the average investor in corporate securities can get a positive real rate of return. (2) More important, if everyone else is “irrational,” it by no means follows that one can make money by being rational, at least in the short run. With discounting, even eventual success may not be worthwhile. Consider, for example, a firm that engages in research and development which depresses the current profit and loss statement. Irrational investors look only at this information, and therefore the price of the stock is below the expected value of future dividends based on the profitable outcomes of the research and development. In a perfectly working market with rational individuals, stock prices would gradually rise as the realization date approached, but prices in the actual market would be constant. A rational investor would understand the future value of the stocks, but he or she could not realize any part of this gain during the gestation period. Although the rational investor may get rewarded eventually if the stock is held long enough, he or she is losing liquidity during an intervening period which may be long. Hence, the demand for the stock even by the rational buyers will be depressed. As Keynes argued long ago, the value of a security depends in good measure on other people’s opinions.

The terms of trade with the outside world should not be regarded as freely given to the firm. In a world with a large number of commodities, even knowing the prices of relevant commodities involves the costly acquisition of certain kinds of information.