Information Cascade in Seeking Financial Advice
On October 25, 2019, U.S.News released the article, Don’t Wait Until There’s a Crisis to Hire An Advisor written by Dan Kern. The article addresses the reasons why people need to plan ahead on their financial matters and seek professional assistance. Financial plans usually involve multiple goals, a long-term time horizon, and trade-offs between conflicting goals. An experienced financial advisor is able to provide objective advice considering debts, savings, investments, insurance, and trade-offs. Kern introduced different types of advisory opportunities in the financial planning realm. At first, he talked about robo advisors. Robo advisors are digital platforms that provide basic financial advice based on clients’ risk tolerance. Robo advisors have become more popular in the past few years because they offer low-cost advice to many investors who worried about building trust with a human advisor. Kern also discussed the importance of receiving human advice when making a complex financial plan. He points out that even though robo advisors are easily accessible, human financial advisors are better at balancing between multiple, and conflicting goals that their clients had. In order words, online robo advisors have not yet fully incorporated humanized features, thus their machine learning algorithms are not able to provide further information for clients who have complex financial considerations.
This article relates to our discussion of the information cascade. As mentioned in the class, information cascade describes a phenomenon in which people observe the choices of others, and make their own decisions or inferences based on that observation while ignoring their own knowledge or obtaining more information by themselves. Therefore, this behavior is not simply an irrational imitation. The idea of an information cascade can be applied in the situation of hiring a financial advisor. People are likely to seek advice from their personal financial advisor because they don’t have much knowledge or information of their own, and they believe that the professional financial advisors know more information that could possibly back up their decision making.