Black Swans Don’t Live in AI

by | Oct 30, 2023 | Risk Report | 0 comments

Worry is within the purview of Team Regulator, and they do it well.

This week, Gary Gensler of the SEC voiced his concern to FT that AI will cause substantial financial instability within the next decade.

So here is his thinking:

Financial institutions, especially investment banks, asset managers, brokers, and advisors, are increasingly using AI for everything from discovering market bubbles over portfolio optimization to long-term strategic moves.

There is nothing wrong with that as such…except that there is a very high probability that everyone will be using the same base model. If they did not, there would be an information gap that the market would quickly close.

AI or not, the same model spans the same field of outcome, causing Mr. Gensler’s blood pressure to go up due to the risk of herd behavior. That herd moves swiftly and turns on a tweet these days.

And one issue that explains a lot of humanity’s problems is that we don’t always know what we don’t know, and neither does AI. Black swans can still sneak up on us at all times.

What grows Mr. Gensler’s worrywart even more is that he regulates single entities that he can hold responsible for their individual actions, and he isn’t particularly thrilled about the “AI-made-me-do-it” defense because said base model will most likely not reside at the entity but at some big tech company that might or might not be within his reach.

This is the kind of systemic risk his nightmares are made of.

Regitze Ladekarl, FRM, is FRG’s Director of Company Intelligence. She has 25-plus years of experience where finance meets technology.