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Algorithm aversion in delegated investing

Author

Listed:
  • Maximilian Germann

    (European Central Bank)

  • Christoph Merkle

    (Aarhus University BSS
    Danish Finance Institute (DFI))

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 with young adults 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: participants care about returns, but do not have strong preferences which financial intermediary obtains these returns. Contrary to what has been suggested, participants are neither quicker to lose confidence in the algorithm after seeing it err. However, we find that participants’ inability to separate skill and luck when evaluating intermediaries slows down their migration to the algorithm.

Suggested Citation

  • Maximilian Germann & Christoph Merkle, 2023. "Algorithm aversion in delegated investing," Journal of Business Economics, Springer, vol. 93(9), pages 1691-1727, November.
    • Handle: RePEc:spr:jbecon:v:93:y:2023:i:9:d:10.1007_s11573-022-01121-9
    DOI: 10.1007/s11573-022-01121-9
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    More about this item

    Keywords

    Algorithm aversion; Financial technology; Asset management; Delegated investment;
    All these keywords.

    JEL classification:

    • G11 - Financial Economics - - General Financial Markets - - - Portfolio Choice; Investment Decisions
    • G23 - Financial Economics - - Financial Institutions and Services - - - Non-bank Financial Institutions; Financial Instruments; Institutional Investors
    • G41 - Financial Economics - - Behavioral Finance - - - Role and Effects of Psychological, Emotional, Social, and Cognitive Factors on Decision Making in Financial Markets
    • O33 - Economic Development, Innovation, Technological Change, and Growth - - Innovation; Research and Development; Technological Change; Intellectual Property Rights - - - Technological Change: Choices and Consequences; Diffusion Processes

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