Robot Investment Assistants (RIAs here, often Robo-Advisors elsewhere); me? Huge fan. As the basic principles of sound investment can be codified and easily applied in most situations what could be better than an algorithm (or suite of them) providing the novice investor with unbiased and proven-successful good-sense tips?
The paper today from Huimin Ge, Huihang Wu and Xiaoyan Zhang all from Tsinghua University takes a close look at how RIAs affected the investment performance of 284, 241 punters on the Ant platform in China between 2020 and 2021.
The most important finding was that accounts with higher RIA use had better performance.
The why of this, here anyway but the authors acknowledge other work has come to slightly different conclusions, seems to be that novice investors are happy to follow the often clear advice of RIAs. However, it seemed they had little ability to process the other information RIAs can provide*.
[*This makes intuitive sense. ‘Buy retail stocks like XXX’ is always going to have more immediate resonance than ‘Study the balance sheet for the last five quarters of XXX and you’ll see a clear pattern of receivable escalation’. This doesn’t just apply to investing dilettantes. Professionals regularly respond to the same sort of sloppy shorthand; you know who you are!]
Contrary to some findings, in this study use of RIAs didn’t seem to correct four behavioral biases known to be detrimental to long-term performance. They are: excessive trading, a preference for gambling-like payoffs, disposition effects (the taking of profits but running of losses) and trend chasing. Perhaps in time the algos can be tweaked to steer the incautious away from even these sub-par habits?
An interesting difference between robo-advice in China and the U.S. was pointed out i.e. authorities in China care deeply about how individuals are being financially advised unlike the more Devil-take-the-hindmost approach taken by regulators in the U.S.
Bottom line. RIAs work and are here to stay for the soundest of reasons. They lead to better decisions at scalable low cost for the most vulnerable investors; and who, apart from the over-priced incumbent advisors, wouldn’t want that? 🙂
You can read the paper in full via the following link How Robo-Advisors Help in China.
Happy Sunday.