IDEAS home Printed from https://ideas.repec.org/p/rco/dpaper/276.html

Do Robo-Advisors Make Us Better Investors?

Author

Listed:
  • Back, Camila

    (LMU Munich)

  • Morana, Stefan

    (Saarland University)

  • Spann, Martin

    (LMU Munich)

Abstract

Investors increasingly can obtain assistance from “robo-advisors,” artificial intelligence–enabled digitalized service agents imbued with anthropomorphic design elements that can communicate using natural language. The present article considers the impact of anthropomorphized robo-advisors on investment decisions, with a focus on their ability to mitigate investors’ behavioral biases. We study the well-documented disposition effect, which reflects investors’ greater propensity to realize past gains than past losses. In two induced-value laboratory experiments, the availability of a robo-advisor reduces (i.e., mitigates) investors’ disposition effect. This relationship is mediated by two simultaneous (indirect) effects: the extent of requests for the robo-advisor’s investment advice and perceptions of its socialness. These findings resonate with cognitive dissonance theory, which predicts that assigning responsibility to the advisor helps investors resolve a sense of discomfort that may arise after a financial loss. Anthropomorphic design elements alone are not sufficient to reduce the disposition effect, but they decrease investors’ propensity to seek advice, which offsets the positive (indirect) effect of perceived socialness. These results have implications for the ongoing automation of advisory services, as well as for improving decision making, and suggest some further research directions.

Suggested Citation

  • Back, Camila & Morana, Stefan & Spann, Martin, 2021. "Do Robo-Advisors Make Us Better Investors?," Rationality and Competition Discussion Paper Series 276, CRC TRR 190 Rationality and Competition.
    • Handle: RePEc:rco:dpaper:276
    as

    Download full text from publisher

    File URL: https://rationality-and-competition.de/wp-content/uploads/2021/02/276.pdf
    Download Restriction: no
    ---><---

    References listed on IDEAS

    as
    1. Rau, Holger A., 2015. "The disposition effect in team investment decisions: Experimental evidence," University of Göttingen Working Papers in Economics 256, University of Goettingen, Department of Economics.
    2. Rau, Holger A., 2015. "The disposition effect in team investment decisions: Experimental evidence," Journal of Banking & Finance, Elsevier, vol. 61(C), pages 272-282.
    3. Simon Gächter & Eric J. Johnson & Andreas Herrmann, 2022. "Individual-level loss aversion in riskless and risky choices," Theory and Decision, Springer, vol. 92(3), pages 599-624, April.
    4. Thomas Dohmen & Armin Falk & David Huffman & Uwe Sunde & Jürgen Schupp & Gert G. Wagner, 2011. "Individual Risk Attitudes: Measurement, Determinants, And Behavioral Consequences," Journal of the European Economic Association, European Economic Association, vol. 9(3), pages 522-550, June.
    5. Annamarie Lusardi & Olivia S. Mitchell, 2005. "Financial Literacy and Planning: Implications for Retirement Wellbeing," Working Papers wp108, University of Michigan, Michigan Retirement Research Center.
    6. D. Harrison McKnight & Vivek Choudhury & Charles Kacmar, 2002. "Developing and Validating Trust Measures for e-Commerce: An Integrative Typology," Information Systems Research, INFORMS, vol. 13(3), pages 334-359, September.
    7. Gächter, Simon & Johnson, Eric J. & Herrmann, Andreas, 2007. "Individual-Level Loss Aversion in Riskless and Risky Choices," IZA Discussion Papers 2961, Institute of Labor Economics (IZA).
    8. Kirsten Passyn & Mita Sujan, 2006. "Self-Accountability Emotions and Fear Appeals: Motivating Behavior," Journal of Consumer Research, Journal of Consumer Research Inc., vol. 32(4), pages 583-589, March.
    Full references (including those not matched with items on IDEAS)

    Most related items

    These are the items that most often cite the same works as this one and are cited by the same works as this one.
    1. Elisabeth Vollmer & Daniel Hermann & Oliver Musshoff, 2019. "The disposition effect in farmers’ selling behavior: an experimental investigation," Agricultural Economics, International Association of Agricultural Economists, vol. 50(2), pages 177-189, March.
    2. Hermann, Daniel & Mußhoff, Oliver & Rau, Holger A., 2019. "The disposition effect when deciding on behalf of others," Journal of Economic Psychology, Elsevier, vol. 74(C).
    3. Liêu, L.M. & Pelster, M., 2020. "Framing and the disposition effect in a scopic regime," The Quarterly Review of Economics and Finance, Elsevier, vol. 78(C), pages 175-185.
    4. Minh-Lý Liêu, 2021. "Peer attention and the disposition effect," Working Papers Dissertations 81, Paderborn University, Faculty of Business Administration and Economics.
    5. Kirchler, Michael & Lindner, Florian & Weitzel, Utz, 2020. "Delegated investment decisions and rankings," Journal of Banking & Finance, Elsevier, vol. 120(C).
    6. Englmaier, Florian & Grimm, Stefan & Schindler, David & Schudy, Simeon, 2018. "The Effect of Incentives in Non-Routine Analytical Team Tasks – Evidence from a Field Experiment," VfS Annual Conference 2017 (Vienna): Alternative Structures for Money and Banking 168286, Verein für Socialpolitik / German Economic Association.
    7. Laura Hueber & Rene Schwaiger, 2021. "Debiasing Through Experience Sampling: The Case of Myopic Loss Aversion," Working Papers 2021-01, Faculty of Economics and Statistics, Universität Innsbruck.
    8. Michael Kirchler & Florian Lindner & Utz Weitzel, 2018. "Delegated Decision Making and Social Competition in the Finance Industry," Discussion Paper Series of the Max Planck Institute for Behavioral Economics 2018_08, Max Planck Institute for Behavioral Economics.
    9. Cheung, Stephen L. & Rogut, Nathan, 2024. "Portfolio framing and diversification in a disposition effect experiment," Journal of Behavioral and Experimental Finance, Elsevier, vol. 44(C).
    10. Müller, Stephan & Rau, Holger A., 2019. "Decisions under uncertainty in social contexts," Games and Economic Behavior, Elsevier, vol. 116(C), pages 73-95.
    11. Brice Corgnet & Simon Gaechter & Roberto Hernán González, 2020. "Working Too Much for Too Little: Stochastic Rewards Cause Work Addiction," Working Papers 20-04, Chapman University, Economic Science Institute.
    12. Michael Kirchler & Florian Lindner & Utz Weitzel, 2018. "Rankings and Risk‐Taking in the Finance Industry," Journal of Finance, American Finance Association, vol. 73(5), pages 2271-2302, October.
    13. Back, Camila & Morana, Stefan & Spann, Martin, 2023. "When do robo-advisors make us better investors? The impact of social design elements on investor behavior," Journal of Behavioral and Experimental Economics (formerly The Journal of Socio-Economics), Elsevier, vol. 103(C).
    14. Becerra, Oscar & Guerra, José-Alberto, 2023. "Personal safety first: Do workers value safer jobs?," Journal of Economic Behavior & Organization, Elsevier, vol. 212(C), pages 996-1016.
    15. Florian Englmaier & Stefan Grimm & Dominik Grothe & David Schindler & Simeon Schudy, 2024. "The Effect of Incentives in Nonroutine Analytical Team Tasks," Journal of Political Economy, University of Chicago Press, vol. 132(8), pages 2695-2747.
    16. Buchanan, Joy A., 2020. "My reference point, not yours," Journal of Economic Behavior & Organization, Elsevier, vol. 171(C), pages 297-311.
    17. Erica Mina Okada, 2010. "Uncertainty, Risk Aversion, and WTA vs. WTP," Marketing Science, INFORMS, vol. 29(1), pages 75-84, 01-02.
    18. Ciccarone, Giuseppe & Giuli, Francesco & Marchetti, Enrico, 2013. "Power or loss aversion? Reinterpreting the bargaining weights in search and matching models," Economics Letters, Elsevier, vol. 118(2), pages 375-377.
    19. Christiane Ernst & Christian Thöni, 2013. "Bimodal Bidding in Experimental All-Pay Auctions," Games, MDPI, vol. 4(4), pages 1-16, October.
    20. Prado, Melissa & Evans, Richard B. & Zambrana, Rafael, 2020. "Identity, Diversity, and Team Performance: Evidence from U.S. Mutual Funds," CEPR Discussion Papers 14305, C.E.P.R. Discussion Papers.

    More about this item

    Keywords

    ;
    ;
    ;
    ;
    ;

    Statistics

    Access and download statistics

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:rco:dpaper:276. See general information about how to correct material in RePEc.

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If CitEc recognized a bibliographic reference but did not link an item in RePEc to it, you can help with this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: Viviana Lalli (email available below). General contact details of provider: https://rationality-and-competition.de .

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service. RePEc uses bibliographic data supplied by the respective publishers.