SEC Chairman Gary Gensler expects AI to be at the center of future financial crises.

SEC Chairman Gary Gensler expects AI to be at the center of future financial crises.

AI and finance

Artificial Intelligence in Finance: A Blessing or a Curse?

In a recent interview with The New York Times, Gary Gensler, the chairman of the Securities and Exchange Commission (SEC), expressed his concerns about the impact of artificial intelligence (AI) on the financial markets. He predicted that the U.S. would eventually rely on just two or three foundational AI models, leading people to become more reliant on the same information and potentially acting in a herd mentality.

Gensler’s worry is that this technology could be at the center of future financial crises. He believes that the powerful economics of scale and networks around AI could create a herd mentality in investment decisions, much like what we have seen with meme stocks. However, unlike retail investors who have a limited impact on the market, if AI gives bad advice, it has the potential to affect a much larger group of people.

One of the key issues that arise from this is the question of responsibility and liability. As of now, there is no real legal framework for holding AI accountable for its actions. Gensler, however, firmly believes that investment advisers using AI algorithms should have the same fiduciary duty of care and loyalty to their clients as human advisers.

This has been a topic on Gensler’s mind for quite some time. In a speech at the National Press Club, he warned about the dangers of AI producing monocultures that could heighten financial fragility. He acknowledged that current regulations are not sufficient and will need to be updated to address the challenges that AI presents to financial stability.

Gensler draws parallels between the emergence of AI and previous technological breakthroughs like the internet in the mid-1990s and the invention of the automobile in 1886. These advances have had far-reaching effects on society, and AI is predicted to do the same, with the potential to be a key feature in after-action reports on the next financial crisis.

In a 2020 paper on deep learning and its impact on financial markets, Gensler and his co-authors warned that the broad adoption of deep learning could increase interconnectedness and regulatory gaps, leaving the financial system more fragile. Existing regulatory regimes in the financial sector, built in an earlier era of data analytics technology, may fall short in addressing the risks posed by deep learning.

While Gensler appears to hold genuine concerns about the role of AI in the financial markets, not everyone shares his level of worry. Greg Jensen, co-chief investment officer at Bridgewater Associates, the world’s largest hedge fund, dismissed the idea of using large language models to pick stocks as a fool’s mission. He believes that AI is not the solution for successful equity trading.

A study conducted by Morgan Stanley presents a more neutral viewpoint. It acknowledges that AI financial advisors will bring significant changes to the investment landscape in the future. However, for now, most clients still prefer the human touch when it comes to financial advice.

Gensler’s warnings about AI’s impact on the financial markets extend beyond the recent explosion of ChatGPT. He has been thinking about the risks and challenges posed by AI for years. He emphasizes the need for policymakers to consider system-wide or macro-prudential policy interventions to address the potential threats AI may pose to financial stability.

In conclusion, the integration of AI in the financial markets presents both opportunities and risks. While it has the potential to improve decision-making and increase efficiency, it also raises concerns about herd mentality, accountability, and regulatory gaps. As AI continues to advance, it is crucial that policymakers, regulators, and market participants work together to ensure that this powerful technology is harnessed responsibly in the best interests of investors and the stability of the financial system.

Note: This article has been rewritten for a more emotionally rich, humorous, and positive tone while providing richer background information and in-depth insights.