Trade-offs in the design of financial algorithms

Alexia Gaudeul and Caterina Giannetti

Discussion Papers from Dipartimento di Economia e Management (DEM), University of Pisa, Pisa, Italy

Abstract: We investigate trade-offs when trying to encourage adoption of stock-trading algorithms. We organize an artificial stock market experiment over three weeks where investors experience trading on their own and with the help of a financial algorithm.They then choose whether to adopt it. We vary the algorithm in terms of its trading strategy and whether its decisions can be overriden or not. We find that adoption rates are low, but investors are more likely to adopt an algorithm that trades actively and that they can override. The investor’s trading preferences, as revealed by their own trading decisions, does not consistently affect algorithm take-up. Rather, algorithm adoption depends mainly on how succesful a trader was when trading on their own vs. when an algorithm was trading in their place. Analysis of an exit questionnaire matches those observations with the reasons given by individuals for rejecting or adopting a financial algorithm.

Keywords: algorithm aversion; disposition effect; robo-advisers; sophisticated investors; stocktrading (search for similar items in EconPapers)
JEL-codes: G11 G40 (search for similar items in EconPapers)
Date: 2023-03-01
New Economics Papers: this item is included in nep-cmp and nep-exp
Note: ISSN 2039-1854
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (1)

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Persistent link: https://EconPapers.repec.org/RePEc:pie:dsedps:2023/288

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