Personalized Robo-Advising: Enhancing Investment through Client Interactions

50 Pages Posted: 6 Nov 2019 Last revised: 3 Aug 2020

See all articles by Agostino Capponi

Agostino Capponi

Columbia University

Sveinn Olafsson

Columbia University

Thaleia Zariphopoulou

University of Texas at Austin - Red McCombs School of Business

Date Written: July 31, 2020

Abstract

Automated investment managers, or robo-advisors, have emerged as an alternative to traditional financial advisors. The viability of robo-advisors crucially depends on their ability to offer personalized financial advice. We introduce a novel human-machine interaction framework, in which the robo-advisor solves an adaptive mean-variance portfolio optimization problem. The risk-return tradeoff dynamically adapts to the client's risk profile, which depends on idiosyncratic characteristics as well as on market performance and varying economic conditions. We characterize the optimal level of personalization in terms of a tradeoff faced by the robo-advisor between receiving client information in a timely manner and mitigating the effect of behavioral biases in the risk profile communicated by the client. We argue that the optimal portfolio's Sharpe ratio and return distribution improve if the robo-advisor counters the client's tendency to reduce portfolio risk during economic contractions, when the market risk-return tradeoff is more favorable.

Keywords: robo-advising, Fintech, portfolio choice, adaptive control, regret, human-advisor

JEL Classification: G11, O33, C61

Suggested Citation

Capponi, Agostino and Olafsson, Sveinn and Zariphopoulou, Thaleia, Personalized Robo-Advising: Enhancing Investment through Client Interactions (July 31, 2020). Available at SSRN: https://ssrn.com/abstract=3453975 or http://dx.doi.org/10.2139/ssrn.3453975

Agostino Capponi (Contact Author)

Columbia University ( email )

S. W. Mudd Building
New York, NY 10027
United States

Sveinn Olafsson

Columbia University ( email )

331 S.W. Mudd Building
500 West 120th Street
New York, NY 10027
United States
7655887631 (Phone)

Thaleia Zariphopoulou

University of Texas at Austin - Red McCombs School of Business ( email )

Austin, TX 78712
United States

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