What is it about?
This paper explores how roboadvisors—digital fintech platforms that manage investments using algorithms—help everyday people make smarter financial decisions. Roboadvisors use a mathematical approach called Modern Portfolio Theory (MPT) to create investment plans that balance risk and return. They make decisions that are mathematically optimal, even for people who may not understand finance or investing. The study finds that roboadvisors act as "rational actors" on behalf of their users, performing tasks that align with the ideal of a highly logical and informed investor. By analyzing 20 popular roboadvisors, the research shows that these platforms generate better investment outcomes than most human advisors or do-it-yourself investors. However, this reliance on algorithms also raises questions about how much control and understanding people give up when they let machines make decisions for them.
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Why is it important?
This paper is unique because it combines economic sociology with cutting-edge technology, showing how algorithms can "perform" rationality in ways that real humans often can’t. It provides a new perspective on how technology reshapes financial behavior by empowering users while also taking some of their decision-making out of their hands. It’s timely because roboadvisors, and fintech more broadly, are growing rapidly, managing billions of dollars worldwide. As people rely more on algorithms for financial decisions, understanding the benefits and risks of these systems becomes critical—not just for investors but for the broader financial system.
Perspectives
What I find fascinating about this paper is how it challenges the myth of the "rational investor." The idea that ordinary people—or even professionals—can consistently make perfectly logical investment decisions is unrealistic. Roboadvisors step in to bridge that gap, but they do so by taking over tasks that require expertise and precision. This creates a fascinating paradox: people who use roboadvisors achieve better outcomes, but they may also lose touch with the knowledge and skills that define traditional investing. For me, the most thought-provoking part is how roboadvisors are a mix of empowerment and dependence. On one hand, they democratize access to high-quality financial advice, making investing easier and more inclusive. On the other hand, they push us to trust algorithms blindly, which could have unintended consequences, like over-reliance on technology or vulnerability to system failures. This research serves as a reminder that technology doesn’t just solve problems—it also shapes the way we think about and interact with the world. As roboadvisors become more integrated into our financial lives, we need to ask tough questions about the trade-offs between efficiency and autonomy, and between convenience and understanding.
Dr. Adam Hayes
University of Lucerne
Read the Original
This page is a summary of: Enacting a rational actor: Roboadvisors and the algorithmic performance of ideal types, Economy and Society, October 2020, Taylor & Francis,
DOI: 10.1080/03085147.2020.1782054.
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