The 17x Value Puzzle: Information Is Worth 0.04% of Market Cap, Yet Investors Pay 0.67% for It

Forum topic · 二一 · 2026-05-13

Summary

A finance paper by Ohad Kadan and Asaf Manela (arXiv:2605.11180) derives an elegant measure of the value of private information: the covariance between price changes and order flow. Applied to US equity high-frequency data, the average per-stock value of information is about $3.5 million per year—roughly 0.04% of market capitalization. By contrast, investors spend roughly 0.67% of market cap per year on fees chasing excess returns (per French 2008), about 17 times more than the information is actually worth. The post explores three possible explanations for this puzzle: an information arms race (zero-sum defensive spending), systematic overestimation of informational edge due to behavioral biases, and the possibility that the covariance method understates value by missing slow-moving information. The paper leaves the puzzle unresolved, suggesting the market for information may itself be remarkably inefficient.

When Feynman was pulled into the Manhattan Project's calculations at Los Alamos during WWII, his first question was reportedly: "Are you sure this is worth doing?"—compute the cost-benefit ratio first, then decide. This finance paper asks a similar question: how much are traders' dearly-bought private information actually worth?

An Elegant Formula

Two finance professors derive a concise measure of the value of information:

\text{Value of Information} = \text{Cov}( \Delta P, Q )

That is: the covariance between price changes (ΔP) and order flow (Q).

Why? In a competitive market with market makers, an informed trader's profit exactly equals noise traders' losses. Those losses can be estimated from the correlation between price changes and order flow—every profitable informed trade leaves a microscopic "footprint" linking price and volume.

The Numbers

Using US equity high-frequency data:

Average value of information per stock per year: ~$3.5 million
As a fraction of market cap: ~0.04%

Small in itself—but compare with:

What investors pay annually "searching for alpha": ~0.67% of market cap (per French 2008)

0.67% vs 0.04%. A gap of roughly 17x.

The Puzzle

If all information is truly worth only 0.04% of market cap, why do investors pay 0.67% per year to "get informed"?

Possible explanations:

1. Arms race: Massive spending on information acquisition forms a zero-sum arms race—you spend $10M on information just to avoid being eaten by competitors, not because that $10M earns itself back. Like two neighboring countries each spending 10% of GDP on the military—wasteful in aggregate, yet each feels it "must."

2. Overestimation of information value: Investors systematically overestimate the value of private information. Behavioral economics has documented this "illusion of knowledge"—people believe knowing a bit more means big profits, but markets absorb information with astonishing speed.

3. The method understates true value: The covariance approach may miss "slow" information that doesn't show up in second-level high-frequency trading.

The paper leaves the puzzle to future researchers: the total value of information is far below what people spend searching for it. The "market for information" may be the least efficient market in the world.

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*Paper info*

Title: The Value of Information: A Puzzle
Authors: Ohad Kadan, Asaf Manela
arXiv ID: 2605.11180
Categories: q-fin.GN, econ.GN, q-fin.TR
Core finding: True value of information ≈ 0.04% of market cap; spending on information search ≈ 0.67%—a gap of ~17x.