Algorithm Aversion: Theory and Evidence from Robo-Advice

59 Pages Posted: 24 Dec 2022

See all articles by Cynthia A. Pagliaro

Cynthia A. Pagliaro

Vanguard Group, Inc.

Tarun Ramadorai

Imperial College London; Centre for Economic Policy Research (CEPR); European Corporate Governance Institute (ECGI)

Alberto G. Rossi

Georgetown University

Stephen P. Utkus

University of Pennsylvania; Center for Financial Markets and Policy, Georgetown University

Ansgar Walther

Imperial College London

Date Written: December 13, 2022

Abstract

Algorithms hold great potential to lower costs and democratize access to a wide variety of consumer services. How do humans interact with algorithms, and what are the major barriers to algorithmic adoption? We answer these questions using a structural model applied to unique data that captures interactions between human clients and “hybrid” robo-advisors that offer different levels and standards of human counseling to complement algorithmic investment. The model features three dimensions of investors’ algorithm aversion, all of which can be influenced by human advice, namely: a per-period disutility of dealing with the algorithm, pessimism about the algorithm’s ability to manage assets, and uncertainty about the algorithm’s performance. We estimate the model’s parameters using quasi-random variation in the matching of clients with human advisors generated by mechanical allocation rules. We find evidence that algorithm aversion is mainly driven by ongoing disutility and uncertainty and that human advice is important in retaining investors in robo-advice during market downturns.

Keywords: FinTech, Portfolio Choice, Behavioral Finance, Individual Investors, Technology Adoption, Structural Estimation, Algorithmic Aversion, Roboadvising

JEL Classification: D14, G11, O33

Suggested Citation

Pagliaro, Cynthia A. and Ramadorai, Tarun and Rossi, Alberto G. and Utkus, Stephen P. and Walther, Ansgar, Algorithm Aversion: Theory and Evidence from Robo-Advice (December 13, 2022). Available at SSRN: https://ssrn.com/abstract=4301514 or http://dx.doi.org/10.2139/ssrn.4301514

Cynthia A. Pagliaro

Vanguard Group, Inc. ( email )

100 Vanguard Boulevard, J24
Malvern, PA 19355
United States

Tarun Ramadorai

Imperial College London ( email )

South Kensington Campus
Exhibition Road
London, Greater London SW7 2AZ
United Kingdom

HOME PAGE: http://www.tarunramadorai.com

Centre for Economic Policy Research (CEPR) ( email )

London
United Kingdom

European Corporate Governance Institute (ECGI) ( email )

c/o the Royal Academies of Belgium
Rue Ducale 1 Hertogsstraat
1000 Brussels
Belgium

Alberto G. Rossi (Contact Author)

Georgetown University ( email )

McDonough School of Business
Georgetown University
Washington, DC 20057
United States

Stephen P. Utkus

University of Pennsylvania ( email )

3641 Locust Walk
Philadelphia, PA 19104-6365
United States

Center for Financial Markets and Policy, Georgetown University ( email )

Washington, DC 20057
United States

Ansgar Walther

Imperial College London ( email )

South Kensington Campus
Exhibition Road
London, Greater London SW7 2AZ
United Kingdom

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