Algorithm Aversion: Theory and Evidence from Robo-Advice

43 Pages Posted: 24 Dec 2022 Last revised: 3 Apr 2023

See all articles by Fiona Greig

Fiona Greig

The 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

Automation can lower costs and democratize access to many consumer services, but human discomfort with automation can pose barriers to technology adoption. We build a structural model of psychological "algorithm aversion," which features ongoing disutility of dealing with an algorithm, pessimism about the algorithm's ability, and uncertainty about the algorithm's performance; all three components can be assuaged by human interaction. We estimate model parameters using unique data from a "hybrid" robo-advising service in which portfolio management is automated, but clients are randomly matched with human advisors who provide different standards of support. Algorithm aversion is mainly driven by ongoing disutility and uncertainty, and human advice is especially 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

Greig, Fiona 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

Fiona Greig

The Vanguard Group, Inc. ( email )

100 Vanguard Blvd
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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