Judge Me on My Losers: Do Robo-Advisors Outperform Human Investors during the COVID-19 Financial Market Crash?

Production and Operations Management, Forthcoming

50 Pages Posted: 30 Nov 2020 Last revised: 8 May 2023

See all articles by Che-Wei Liu

Che-Wei Liu

Indiana University Bloomington - Kelley School of Business

Mochen Yang

University of Minnesota - Twin Cities - Carlson School of Management

Ming-Hui Wen

National Taipei University of Business - College of Innovative Design and Management

Date Written: May 8, 2023

Abstract

As financial institutions increasingly offer Robo-advisors (RAs) as a service, the empirical evidence on their performance, particularly during market downturns, remains limited. We study the impact of using RAs on investment performance during the 2020 financial crisis caused by the COVID-19 global pandemic. We obtain daily portfolio and transaction data of investors on an online investment platform. Besides making investment decisions by themselves, investors can also leverage an RA system offered by the platform. We match RA users with other investors who did not use the RA with similar investor and portfolio characteristics before the market crash, then compare their portfolio returns after the crash. We find that RA users experienced significantly fewer losses during the market downturn, and this performance advantage came from the RA-managed assets (rather than assets managed by RA users themselves). We further show that the RA system adjusted their portfolios to hold less risky funds, whereas human investors stayed with their status quo and did not reduce the risk of their portfolios, which partly accounted for the performance discrepancy. Importantly, the RA’s superior performance was not simply a continuation of its performance in a normal market; in fact, we find RA users to have similar portfolio returns as non-RA investors during normal markets, and the benefits of RA’s risk-reduction trading strategy only manifested during the financial crisis. Our work offers an empirical assessment of RAs’ performance under different market conditions and advances the understanding of algorithmic decision-making in financial markets.

Keywords: financial crisis, robo-advisor, adaptivity, status-quo bias, financial services and operations

Suggested Citation

Liu, Che-Wei and Yang, Mochen and Wen, Ming-Hui, Judge Me on My Losers: Do Robo-Advisors Outperform Human Investors during the COVID-19 Financial Market Crash? (May 8, 2023). Production and Operations Management, Forthcoming, Available at SSRN: https://ssrn.com/abstract=3737821 or http://dx.doi.org/10.2139/ssrn.3737821

Che-Wei Liu (Contact Author)

Indiana University Bloomington - Kelley School of Business ( email )

1309 E 10th Street, Hodge Hall 4100
Bloomington, IN 47405
United States

Mochen Yang

University of Minnesota - Twin Cities - Carlson School of Management ( email )

19th Avenue South
Minneapolis, MN 55455
United States

Ming-Hui Wen

National Taipei University of Business - College of Innovative Design and Management ( email )

No.321, Sec. 1,
Jinan Rd.
Taipei
Taiwan

HOME PAGE: http://https://profwen.com

Do you have negative results from your research you’d like to share?

Paper statistics

Downloads
693
Abstract Views
2,805
Rank
69,012
PlumX Metrics