Generative AI: A Double-Edged Sword For Investment Decisions And InequalityThe rapid proliferation and adoption of generative artificial intelligence (GenAI) has sparked a revolution across many industries, including the financial sector. A newly published study by Alex Kim and colleagues, “AI, Investment Decisions, and Inequality,” explores how GenAI influences individual investment decisions. The researchers sought to answer whether GenAI-based tools enhance investors’ ability to process data and make better investment decisions as well as whether access to GenAI narrows or widens gaps among different types of investors.
Their findings illuminate the promise of GenAI, but also uncover a paradox. While GenAI improves overall investment performance by up to 9.6% for sophisticated investors, it may inadvertently exacerbate inequality among investors depending on their financial expertise. Or as Ethan Mollick, a professor at The Wharton School, put it, “AI helps everyone, but expertise amplifies its benefits considerably!”
Bridging The Information Gap: The Promise Of Generative AI
Generative AI has been at the forefront of experimentation in many industries. Companies are trialing whether and how much GenAI can boost worker performance and improve operating margins. Many have also argued that GenAI will be a powerful democratizing force; however, Kim’s paper shows that investment decision-making presents unique challenges, setting it apart from other domains where AI has proven to level the playing field. The key difference when it comes to investing lies in the need for not only interpretation of information but also subsequent action based off of the insights.
Unlike some other fields, simply providing information through AI is not enough; to improve returns, the ability to understand and act on the information is essential. In other words, whereas the output from a GenAI-powered model may represent the end goal for some tasks, like writing or programming, “an AI-generated analysis of firm performance is not valuable on its own because investors must still be able to interpret the information to take appropriate action,” the study authors write. While GoogleLLM Notebook can summarize and explain information about goodwill impairment, for example, “it becomes valuable only when investors understand how these concepts inform their decisions.”
Experiment 1: Tailored Generative AI Summaries And Decision-Making
In the first experiment, the researchers divided 1,800 participants into “sophisticated” and “less sophisticated” groups based on their financial literacy. Participants were then randomly assigned to receive raw earnings call transcripts, AI-generated summaries tailored to their expertise level, or summaries mismatched to their skill level (e.g., a less sophisticated participant received a more advanced AI-generated summary). Participants then analyzed these materials to predict earnings changes and allocate hypothetical $1,000 port