Investor perception of algorithms: A study on Swedish retail investors' perception of algorithms in quantitative exchange traded funds

Abstract: ETFs are increasing in popularity, enabling short-term trading to a much higher degree than mutual funds. The ETFs with the highest average management fee are those utilising quantitative models. This incentivises providers to market such products as they earn a higher kickback commission from quantitative ETF sales than they do others. Studies on bullshit and behavioural psychology have shown that mathematics could create a false sense of meaningfulness. Quantitative funds are fundamentally reliant on their algorithms and may therefore be tempted to utilise their mathematical models in their presentations. This quantitative study examined if, and if so how, retail investors may be manipulated by the addition of an algorithm out of context when exposed to information of ETFs. Data was gathered through an online self-completion questionnaire. Results suggest respondents are attentive as there is no effect on the perception of the ETF when an algorithm is included. This finding was true both for positively and negatively framed ETFs. These general findings are furthermore unaffected by the competence of the investor, with a minor exception in ETF knowledge and the perceived risk of the ETF.