Choosing a consultant in a dynamic investment problem

TL;DR

This paper analyzes a dynamic investment decision-making problem where investors choose between projects or seek consultant advice, revealing how consultation costs influence optimal strategies and the role of information disclosure.

Contribution

It introduces a model for optimal consulting strategies in dynamic investments, highlighting the impact of consultation costs and information disclosure probabilities.

Findings

Consultants disclosing the state are always used if they reveal information with nonzero probability.

Optimal strategies depend on the belief state and consultation costs.

Low consultation costs lead to consistent use of informative consultants.

Abstract

Consider a dynamic decision-making scenario where at every stage the investor has to choose between investing in one of two projects or gathering more information. At each stage, the investor may seek counsel from one of several consultants, who, for a fixed cost, provide partial information about the realized state. We explore the optimal strategy and its dependence on the belief and the consultation cost. Our analysis reveals that if one of the consultants discloses the state with a nonzero probability, this consultant will be used in any optimal strategy, provided the consultation cost is sufficiently small.