Robo advisors Flashcards
Critique of humans in AM
and example in Jerala
Behavourial critique of humans: Rationality not suported by data, loss aversion, overconfidence, over reaction, herding etc
Tech in India: 1997-2001 mobile phones introduced in Kerala India and led to a dramtic reduction in price dispersion, elimination of waste and near-perfect adherence to law of one price (Jensen)
How do they work
Previously use public data –
Satellite images on Shipping containers or Parking slots to forecast earnings – Use advanced technology to read all the news articles in the world
– Analyze what people think and their sentiments
I have no doubt that econometrics is a primary reason economics and finance have not experienced meaningful progress over the past 70 years(Lopez de Prado)
– ML algorithm learns patterns in a high-dimensional space without being specifically directed.
What it is and benefits
App that takes the place of a human financial advisor
Can aggregate your accounts, present your financial situation, facilitate transfers, and in general handle the logistics of your finances
Key value added by robo-advisors isn’t the logistics
- It’s helping to achieve financial goals * Directing your savings to the right portfolio
Focusing on delivering high-impact investment advice at high volume and low cost
Who uses them
Natwest, fidelity, vanguard all has robo-advisors, with cheaper fees. 1,3 trillion assets under management in robo advisor market
Coleman (recommendations) / Rossi (Home bias)
Coleman et,al. : robo analysis produces a more balanced distribution of buy, hold, sell recommendations. They revise their recommendations more frequently than humans. But incorporate weak short window return reactions
Rossi: Eliminates home bias and increases investors overall risk adjusted performance, by lowering investors portfolio risk
Lo Mit (human cognition)
Robo advisers don’t consider the limits of human cognition, make allowances for emotional reactions like fear and greed, and can’t eliminate blind spots. Robo advisers don’t do emotion. When the stock market roils, investors freak out. They need comfort and encouragement…. (Andrew Lo, MIT)
Melzer et al (one size)
Non financial firms
Advisers often adopt a one-size-fits-all approach and might be prone to behavioral biases or display cognitive limitations (Linnainmaa, Melzer, and Previtero 2017). Robo-advising is by construction neutral to the idiosyncrasies of specific human advisers.
Many market observers expect that non-financial firms (large technology leaders) will also become key players in the robo-adviser industry as they look to monetize their access to user data.
