Robo-advising: Learning Investors' Risk Preferences via Portfolio Choices

Humoud Alsabah, Agostino Capponi, Octavio Ruiz Lacedelli and Matt Stern

Papers from arXiv.org

Abstract: We introduce a reinforcement learning framework for retail robo-advising. The robo-advisor does not know the investor's risk preference, but learns it over time by observing her portfolio choices in different market environments. We develop an exploration-exploitation algorithm which trades off costly solicitations of portfolio choices by the investor with autonomous trading decisions based on stale estimates of investor's risk aversion. We show that the algorithm's value function converges to the optimal value function of an omniscient robo-advisor over a number of periods that is polynomial in the state and action space. By correcting for the investor's mistakes, the robo-advisor may outperform a stand-alone investor, regardless of the investor's opportunity cost for making portfolio decisions.

Date: 2019-11, Revised 2019-11
New Economics Papers: this item is included in nep-cmp and nep-rmg
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