Algorithm aversion in delegated investing

Published in Journal of Business Economics, 2023

Recommended citation: Germann, Maximilian and Christoph Merkle. (2022). "Algorithm aversion in delegated investing." Journal of Business Economics, 93, 1691-1727.

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.

Open access journal version

JEL codes: G11, G23, G41, O33.

Keywords: Algorithm aversion, Financial technology, Asset management, Delegated investment.