Seminar – Algorithm aversion: Theory and evidence from robo-advice

Tarun Ramadorai, Professor of Financial Economics, Imperial College London

A light lunch will be available outside the Fadi Boustany Lecture Theatre from 12:15.

Algorithms hold great potential to lower costs and democratise access to a wide variety of consumer services. How do humans interact with algorithms, and what are the major barriers to algorithmic adoption? We answer these questions using a structural model applied to unique data that captures interactions between human clients and “hybrid” robo-advisers that offer different levels and standards of human counselling to complement algorithmic investment. The model features three dimensions of investors’ algorithm aversion, all of which can be influenced by human advice, namely: a per-period disutility of dealing with the algorithm, pessimism about the algorithm’s ability to manage assets, and uncertainty about the algorithm’s performance. We estimate the model’s parameters using quasi-random variation in the matching of clients with human advisers generated by mechanical allocation rules. We find evidence that algorithm aversion is mainly driven by ongoing disutility and uncertainty and that human advice is important in retaining investors in robo-advice during market downturns.

Speaker bio

Tarun Ramadorai is Professor of Financial Economics at Imperial College London. He has a broad range of research interests in household finance, asset pricing, international finance, and real estate. He is greatly interested in finance and economics issues in emerging markets, with a particular focus on India. He has published on these topics in a number of scholarly journals in finance and economics including the American Economic Review, the Review of Economic Studies, the Journal of Economic Literature, the Journal of Finance, the Journal of Financial Economics, and the Review of Financial Studies.

Tarun currently serves as Editor of the Review of Financial Studies. He has previously served as an Associate Editor of the Review of Financial Studies and Management Science, and as a council member of the Society of Financial Studies. He is currently a Director of the European Finance Association, a Research Fellow of the Centre for Economic Policy Research (CEPR), a Senior Academic Fellow of the Asian Bureau of Finance and Economics Research (ABFER), and a Nonresident Senior Fellow at the National Council of Applied Economic Research (NCAER).

He has served in a range of policy and practice roles in addition to his academic work, including Chairman of the Inter-Regulatory Committee on Household Finance constituted by the Reserve Bank of India, Visiting Scholar at the Economic Advisory Council to the Prime Minister of India, Economic Adviser to the European Securities and Markets Authority, and Allocation Advisory Board Member for the Norwegian Sovereign Wealth Fund (NBIM). He currently serves as co-Chair of the Fintech workstream of the India-UK Financial Partnership.

Tarun has a BA in Mathematics and Economics from Williams College, an MPhil in Economics from the University of Cambridge, and a PhD in Business Economics from Harvard University. Prior to his role at Imperial, Tarun spent over a decade at the University of Oxford.

For more information, please contact Eleanor Stefiuk.