Algorithm Aversion in Financial Investing

52 Pages Posted: 6 Nov 2019

See all articles by Maximilian Germann

Maximilian Germann

University of Mannheim - Department of Banking and Finance

Christoph Merkle

Aarhus University

Date Written: July 19, 2019

Abstract

The tendency of humans to shy away from using algorithms – even when algorithms observably outperform their human counterpart – has been referred to as algorithm aversion. We conduct an experiment to test for algorithm aversion in financial decision making. Participants acting as investors can tie their incentives to either a human fund manager or an investment algorithm. We find no sign of algorithm aversion: Investors care about returns, but do not have strong preferences which intermediary obtains these returns. Contrary to what has been suggested, investors are also not quicker to lose confidence in the algorithm after seeing it err. However, we find that investors are unable to fully separate skill and luck when evaluating either intermediary.

Keywords: Algorithm Aversion, Financial Technology, Asset Management, Delegated Investment

JEL Classification: G11, G23, G41, O33

Suggested Citation

Germann, Maximilian and Merkle, Christoph, Algorithm Aversion in Financial Investing (July 19, 2019). Available at SSRN: https://ssrn.com/abstract=3364850 or http://dx.doi.org/10.2139/ssrn.3364850

Maximilian Germann

University of Mannheim - Department of Banking and Finance ( email )

L9, 1-2
Mannheim, 68161
Germany

Christoph Merkle (Contact Author)

Aarhus University ( email )

Nordre Ringgade 1
DK-8000 Aarhus C, 8000
Denmark

HOME PAGE: http://christophmerkle.github.io/

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