The Effect of Humanizing Robo-Advisors on Investor Judgments

42 Pages Posted: 6 Nov 2019

See all articles by Frank D. Hodge

Frank D. Hodge

University of Washington - Michael G. Foster School of Business

Kim I. Mendoza

University of Illinois at Urbana-Champaign - Department of Accountancy

Roshan K. Sinha

Indiana University - Kelley School of Business - Department of Accounting

Date Written: April 2018

Abstract

Using an experiment, we examine the effect of humanizing robo-advisors (computer algorithms that provide financial advice) on investor judgments. We find that investors are more likely to follow the advice of a robo-advisor when the advisor exhibits fewer human characteristics, whereas they are more likely to follow the advice of a human advisor when the advisor exhibits more human characteristics. We also find that after learning that the advisor’s recommendation underperformed other investment options, investors decrease their reliance on subsequent recommendations the most in two conditions: when the advisor is a robo-advisor with fewer human characteristics, and when the advisor is a human advisor with more human characteristics. Finally, in support of our theory, we find that advisor credibility mediates the relationship between the likelihood of following the advisor’s recommendation and the interaction between the type of advisor and level of humanization. Our findings contribute to the literature examining how technology influences the acquisition and use of financial information and the general literature on human-computer interactions. Our study also addresses a call by the SEC to learn more about the use of robo-advisors. Lastly, our study has practical implications for wealth management firms as they increase their use of robo-advisors.

Keywords: Humanizing Technology, Financial Advisors, Investment Decisions, Robo-Advisors

Suggested Citation

Hodge, Frank Douglas and Mendoza, Kim I. and Sinha, Roshan, The Effect of Humanizing Robo-Advisors on Investor Judgments (April 2018). Available at SSRN: https://ssrn.com/abstract=3158004 or http://dx.doi.org/10.2139/ssrn.3158004

Frank Douglas Hodge

University of Washington - Michael G. Foster School of Business ( email )

Paccar Hall 540, Box 353200
Seattle, WA 98195-3200
United States
206-616-8598 (Phone)
206-685-9392 (Fax)

Kim I. Mendoza (Contact Author)

University of Illinois at Urbana-Champaign - Department of Accountancy ( email )

1206 South Sixth Street
Champaign, IL 61820
United States

Roshan Sinha

Indiana University - Kelley School of Business - Department of Accounting ( email )

1309 E. 10th Street
Bloomington, IN 47405
United States

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