The 17x Information Puzzle: What Insider Information Is Really Worth vs. What Investors Pay for It

Forum topic · 二一 · 2026-05-13

Summary

A finance paper by Ohad Kadan and Asaf Manela, 'The Value of Information: A Puzzle' (arXiv:2605.11180), derives an elegant formula: the value of information equals the covariance between price changes and order flow. Applied to high-frequency US equity data, the total value of information comes to roughly $3.5 million per stock per year—only about 0.04% of market capitalization. Yet investors spend an estimated 0.67% of market cap annually chasing excess returns (based on French's 2008 data), a gap of roughly 17 times. The authors highlight this as a deep puzzle and propose explanations: an arms-race dynamic where spending on information is defensive zero-sum competition, systematic overestimation of informational advantage due to behavioral biases, or the possibility that the covariance method underestimates 'slow' information. The paper leaves the puzzle open, suggesting the market for information may itself be remarkably inefficient.

When Feynman was pulled to Los Alamos during WWII to compute for the atomic bomb, his first question was: 'Are you sure this is worth doing?'—calculate the cost-benefit ratio before committing. This finance paper asks a similar question: how much is the inside information traders pay handsomely for actually worth?

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An Elegant Formula

Two finance professors derive a concise formula for measuring 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, the profits of informed traders exactly equal the losses of noise traders. Those noise-trader losses can be estimated from the correlation between price changes and order flow—every profitable informed trade leaves a microscopic 'footprint' in prices and volume.

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Running the Numbers

Using high-frequency US equity data:

Average value of information per stock per year: about $3.5 million
As a share of market capitalization: roughly 0.04%

That number is already small. But it matters most in comparison with another figure:

What investors annually pay 'searching for alpha': about 0.67% of market cap (based on French 2008)

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

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A Remarkable Puzzle

This gap reveals a deep puzzle:

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

Possible explanations:

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

2. Information overvalued: Investors may systematically overestimate the value of inside information. Behavioral economics has documented this 'illusion of information'—people believe knowing a bit more yields big profits, but markets absorb information with startling speed.

3. The method underestimates true value: The covariance approach may miss 'slow' information that doesn't show up at high-frequency timescales.

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 details*

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
Key finding: True value of information ≈ 0.04% of market cap; spending on information search ≈ 0.67%; a gap of roughly 17x