Personalized Robo-Advising: Enhancing Investment through Client Interactions

Forthcoming in Management Science

54 Pages Posted: 6 Nov 2019 Last revised: 23 Dec 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: December 21, 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 framework, in which a robo-advisor interacts with a client to solve an adaptive mean-variance portfolio optimization problem. The risk-return tradeoff adapts to the client's risk profile, which depends on idiosyncratic characteristics, market returns, and economic conditions. We show that the optimal investment strategy includes both myopic and intertemporal hedging terms which reflect the dynamic risk profile of the client. We characterize the optimal portfolio personalization via a tradeoff faced by the robo-advisor between receiving information from the client in a timely manner and mitigating behavioral biases in the communicated risk profile. We argue that the optimal portfolio's Sharpe ratio and return distribution improve if the robo-advisor counters the client's tendency to reduce market exposure 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 (December 21, 2020). Forthcoming in Management Science, 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

Thaleia Zariphopoulou

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

Austin, TX 78712
United States

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