The Insurmountable Barrier Facing Automated Advice

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Duke basketball fans have a widespread – and sometimes deserved – reputation for being arrogant, smug and generally annoying.

But I have to give the “Dukies” credit for helping to prove that computers and algorithms will never replace human financial advisors.

Behavioral psychologist Dan Ariely made a fascinating discovery in his study of Duke students and their attitudes towards basketball tickets, which are distributed via lottery. The students who didn’t receive tickets told Ariely they would be willing to pay up to $170 for tickets. The students who got tickets said they wouldn’t accept less than $2,400 for their seats.

That crazy divide between what people without tickets were willing to pay for tickets (a smaller amount) and what people with tickets were willing to sell their tickets for (a much greater amount) illustrates three aspects of human nature that impact investment decisions.

We fall in love with what we already have. We focus our attention on potential losses rather than possible gains. And finally, we assume that other people will see the transaction from the same perspective.