Abstract

 
 
 Technological advancements bring continuous changes into the investment industry. The paper aims to provide insights on future research agenda based on a review of the current stance of research on the links between the Robo-advisors phenomenon and behavioural biases of individual investors. A qualitative investigation method has been applied for literature review on Robo-advisors and their impact on behavioural biases.
 The key findings indicate that Robo-advisors can help users to make better informed and less biased decisions. However, Robo-advisors activate the investors’ automatic system processes. The resulting passive investment approach could lead to alienation of the investors from the stock market, decreasing their understanding of the investment process that could widen a gap between different clusters of investors.
 The paper makes several contributions to the literature. First, it provides arguments on why a dual process theoretical framework in the relationship between financial advisory and investment behavioural biases is applicable. Second, it studies the Robo-advisor phenomenon and proposes a comprehensive definition of Robo-advisors. Third, the literature review suggests drivers of the Robo-advisors effect on the changes of behavioural biases as a future research direction.
 
 
Highlights
In theory, investors act as rational agents who maximise expected utility, hold well-diversified portfolios and trade infrequently to minimise taxes and other investment costs (Fama, 1970)
It has provided arguments as to why the dual-process theoretical framework should be applied in examining the relationship between the application of Robo-advisors in investment services and investors’ behavioural biases
The literature review has shown that the effects of the application of automatic rules in Robo-advisors might be examined based on a theoretical framework of the dual process based theory
Summary
Investors act as rational agents who maximise expected utility, hold well-diversified portfolios and trade infrequently to minimise taxes and other investment costs (Fama, 1970). Studies focusing on the performance of individual investors note that they do not always behave as expected utility maximisers and tend to underperform the market. Tversky and Kahneman (1974) showed that heuristics or rules-of-thumb lead to systematic deviations from rational behaviour and predictable errors and biases. Irrational decisions may lead to poor financial returns and a lower level of welfare that may be important considering that demographic trends press on shifting the pay-as-you-go retirement system towards a more occupational and personal insurance system that transfers responsibility from governments to individuals for their financial security after retirement
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