Consumer Investor Research Articles

Legal risks of using regulatory technologies in business and professional activities

When using artificial intelligence technology in RegTech or SupTech solutions to prevent, detect and control financial crimes such as money laundering, it is necessary to be aware that due to compliance costs, many online financial firms are prohibited from providing financial advice, especially if they process transactions on behalf of clients or provide p2p investment platforms. RegTech streamlines KYC/CDD processes and therefore has the ability to reduce compliance costs. This, in turn, will allow more firms to enter the market to offer services. The regulatory goal of ensuring market integrity directly conflicts with the rights of individuals and the Data Protection Acts. It is argued that data governance will need to be established to protect individual rights and public safety. Furthermore, the question remains unresolved as to whether fiduciary duties can be assumed by robo-advisors or consultants using algorithms. Fiduciary duties may also be modified and limited by the parties. The fiduciary duty concerns what the fiduciary (investment adviser) cannot do (conflict of interest) but should not do (act in the best interest of the client). Consequently, the use of common law principles to protect consumer investors is currently underdeveloped, particularly if the AI seeks to provide access to finance and fill gaps in guidance.

Rethinking Automated Investment Adviser Disclosure

Today, investment advisers, including robo-advisers, push dense disclosures to consumer investors who may not be able to fully comprehend their import. Tomorrow, robo-advisers and their innovative technology, if embraced by regulators and consumers, can facilitate and cultivate a trusted collaborative relationship between investor and adviser where the adviser learns from the investor and provides education tailored to the investor, helping to solve vexing consumer protection issues and lessen the impending retirement crisis. More and more of us are comfortable making decisions without human involvement and entirely through a digital interface. Despite consumers’ increasing comfort relying upon machines to direct and guide their decisions, most Americans nevertheless lack basic foundational knowledge in finance and investing. Even those Americans who are able to save for retirement lack financial sophistication and may not be able to understanding the complex products in which they are invested. Robo advice may not be the solution for these problems, as robo-advisers present a potential black box problem where the digital investment advisers may not be capable of explanation beyond the information input and advice output. In such a world, it is not only the new technology that should be questioned. The existing standards through which the new technology is regulated should similarly be explored. An understanding of potential benefits and potential harms may provide lessons that better allow us to protect consumer investors and better prepare for the so-called retirement crisis. This essay explores the parameters of the pre-existing regulatory regime as applied to a new landscape of investing with a focus on the key regulatory tool of disclosure. This short essay examines the challenges of delivering appropriate disclosures in a new world of robo-advisory advice. It suggests a reconceptualization of the aim of disclosure to capitalize on robo-advisers’ ability to truly know their clients and shift the burden of investor education from the customer to a fiduciary level adviser capable of tailoring advice and education to each investor at a level she is capable of understanding. The essay concludes with a recommendation: robo-advisers and investor collaboration via an active and iterative disclosure regime that encourages investor comprehension, understanding, and learning.

Supply and demand on crowdlending platforms: connecting small and medium-sized enterprise borrowers and consumer investors

Consumer crowdlending to small and medium enterprises is an increasingly relevant financial service phenomenon which depends on platforms as an intermediary. To match borrowers’ supply of loan requests and customers’ investment demand, this article proposes that crowdlending platforms need to initiate double switching behavior. On the one hand, switching of enterprise borrowers from traditional bank financing to crowdlending is driven by greater convenience (speed, flexibility, simplicity) and process transparency. Consumers, on the other, predominantly invest in crowdlending loans based on their economic performance relative to the choice set on the platform. We contribute to the literature on crowdfunding, satisfaction and switching in financial services.

‘Will I learn what I want to learn?’ Usable representations, ‘students’ and OECD assessment production

Amid growing debates around international assessment tools in educational policy, few have critically examined how students themselves are cast in policy tool production processes and discourse. Drawing on Stuart Hall's concept of representation, we show how higher education (HE) ‘students’ are constructed, fixed and normalized by the Organisation for Economic Co-operation and Development's (OECD) Assessment of Higher Education Learning Outcomes (AHELO) initiative. Based on an analysis of AHELO texts, we argue that the OECD, during the early stages of test production, fixes and circulates the meaning of ‘students’ as represented objects. We identify and analyze two distinct representational practices at work in AHELO texts: classifying and organizing, and marking. We posit that by fixing images of the student as an object of learning and as a consumer–investor subject, the OECD creates ‘usable’ representations of ‘students’ to claim jurisdiction over teaching and learning in HE and to justify intervention through standardized testing.

Dynamic Strategies for Successful Online Crowdfunding

Crowdfunding is an emerging internet fundraising mechanism for soliciting capital from the crowd to support entrepreneurial ventures, often vowing future products in return. This paper empirically investigates consumer investors’ backing behaviors in the presence of network externalities and a deadline. The proposed model captures how investors form their expectation on the prospect of a project based on its current funding status and time progress. Model estimation shows that investors are more likely to back a project that has already attracted a critical mass of funding goal (positive network externalities). For the same amount of achieved funding, the backing propensity declines over time (negative time effects). These two opposing forces give rise to a critical mass of funding the project must attain on time to achieve successful funding. Simulation studies show that projects may fail to attain the critical mass because of unfavorable shocks in investor visits at the early stage of the funding cycle. We discuss dynamic seeding strategies for project creators to maximize the probability of funding success.

Gravitation Toward Prior Performance in Mutual Fund Advertisings: Do Consumer Investors' Processing Abilities Account for Biased Information Processing?

This study examines the cognitive processes involved in consumer investors' information processing of mutual fund characteristics. We tested whether consumer investors' limited processing abilities account for biased return perceptions, as reported in the literature. Consumer investors' processing abilities were manipulated by varying the duration of information exposure time to a mutual fund advertisement. Experimental results suggest that a longer time spent by consumer investors learning about mutual fund characteristics resulted in reduced reliance on prior fund performance as a heuristic cue, which in turn resulted in an unbiased processing of mutual fund characteristics. In contrast, when consumer investors spent less time learning about mutual fund characteristics, prior fund performance significantly affected subsequent return expectations and argument persuasiveness of the mutual fund advertisement. These findings suggest that disclaimers warning that past performance does not guarantee future results are ineffective when consumer investors have limited attention and lower processing abilities.

Equity premium and consumption sensitivity when the consumer–investor allows for unfavorable circumstances

Introducing one additional element due to possible misfortune to the return of each of two assets in the basic model of Samuelson (Rev. Econom. Statist. 51 (1969) 239) on optimum portfolio and consumption decisions, this paper resolves both the excess equity premium and the excess consumption sensitivity puzzles. This unified treatment provides a framework to study how important state variables will affect the change in aggregate consumption which is considered unpredictable in one formulation of the permanent income hypothesis. The implications of the theory agree with empirical results reported here and elsewhere. The theoretical framework appears to be simple and powerful as compared with alternative theories to explain the two puzzles.

Why Consumers Choose Managed Mutual Funds Over Index Funds: Hypotheses from Consumer Behavior

Much evidence exists which suggests that the vast majority of equity mutual fund managers do not possess differential information (or skills) which allow them to achieve above average market returns for their investors. Thus, when investors pay fees to equity mutual fund managers for investment advice and management, the very probable outcome is that they are reducing the return that they would otherwise achieve by investing in a nonmanaged index fund that tracks the total stock market (e.g., Wilshire 5000) or some significant portion of it (e.g., the Standard & Poor's 500). The long‐term negative consumer welfare implications are large, very possibly in the hundreds of thousands of dollars for individual consumer investors. Drawing largely on insights from the psychology, consumer behavior, and behavioral finance literatures, we offer a series of hypotheses that may partially account for such consumer choices. We conclude with a call for increased government‐ and employer‐sponsored education programs aimed at creating a more informed consumer investor.