Robots for good: how robo advisors and awareness of behavioral biases impact the disposition effect: an abstract

An increasing amount of research aims to understand how consumers make financial decisions. However, there are important gaps in this area, especially related to the influence of behavioral biases in financial decision-making (Wang et al., 2019) and their impact on investors’ performance and well-being. Many individual investors lack the appropriate skills to make sound investment decisions, and yet the number of people investing in financial markets has significantly grown over the last years (Barber et al., 2009). The disposition effect (i.e., the tendency to sell winning investments too early, while keeping losing investments too long; Shefrin & Statman, 1985) is one of the most widespread behavioral biases related to financial decision-making. It has been documented for inexperienced individual investors and highly experienced institutional agents (Chen et al., 2007) when executing a variety of financial decisions (Coval & Shumway, 2005; Genesove & Mayer, 2001; Heath et al., 1999; Heisler, 1994; Locke & Mann, 2005) in real and experimental markets (Grinblatt & Han, 2005). While robo-advisors could be a solution to reduce investors’ disposition effect, research has shown that many investors are reluctant to accept recommendations of a robo-advisor (Hildebrand & Bergner, 2020; Jung et al., 2018). Therefore, three studies investigate under what circumstances investors would increase their use of a robo-advisor so that they can reduce their disposition effect. First, an experimental study based on an investment game examined the impact of availability of robo-advisors (i.e., available vs not available) on the disposition effect. Results showed that there is no significant impact of availability of robo-advisor on the disposition effect. These results suggest that the mere availability of robo-advisors to investors is not a sufficient condition for them to use this investment aid, even if they are informed that the robo-advisor only makes rational decisions. Second, an experimental study examined whether awareness of behavioral biases can moderate the relationship between availability of robo advisors and the disposition effect. The results showed that when investors are aware of their behavioral biases via a just-in-time behavioral finance training, they reduce their disposition effect. Finally, a field study among users of a robo-advisor, conducted in partnership with NALO – a robo-advisor provider, showed that awareness of behavioral biases had a significant impact on actual investment behavior. The more investors are aware of their behavioral biases, the more they invest using robo-advisors. We discuss theoretical and managerial implications of these findings.