A double-edged sword that could trigger the market crash

The stock market’s current AI euphoria, led by companies like NVIDIA developing powerful processors for machine learning, may be masking a more troubling reality. While artificial intelligence promises to revolutionize trading and risk management, it could paradoxically make our financial systems more fragile and susceptible to catastrophic failure.

“There is so much euphoria, with tens or even over a hundred billion dollars being spent on artificial intelligence. Every major investment bank on Wall Street implements it,” notes Jim Rickards, author of the new book Money GPT. However, he controversially states that this widespread adoption of artificial intelligence in financial markets could amplify market crashes beyond anything we’ve seen before.

Composition error

Rickards introduces a compelling concept called the “failure of composition”—where actions that make sense to individual market participants could spell disaster when adopted by everyone. He illustrates this with an analogy: “At a football game, a fan who stands up has a better view. This really works. The problem is that everyone behind them stands up, and the next thing you know, the whole stadium is on their feet and nobody. he has a better view.”

In financial markets, this phenomenon could manifest itself during market downturns. While it might be prudent for individual investors to sell during a crash, if AI systems controlling large amounts of capital all execute similar strategies simultaneously, the result could be catastrophic.

The missing human element

The author argues that one of the most significant risks comes from removing human judgment from the equation. He draws attention to the historical role of New York Stock Exchange specialists who were tasked with keeping the markets orderly: “The specialist was supposed to deal with the market when there was a flood of sellers … to try to balance the market. ” Today’s AI systems, he suggests, lack this nuanced human judgment.

Speed ​​and synchronicity: a dangerous combination

While market panic is not new, AI introduces unprecedented risk through its speed and synchronicity. The automated nature of AI-based trading could accelerate market movements and create feedback loops that human traders could otherwise interrupt. As Rickards warns, “What’s new is the speed at which they can happen, the amplification effect and the recursive function.”

Beyond market crashes: the banking system at risk

Concerns extend beyond stock markets to the banking system itself. Rickards points to the recent collapse of Silicon Valley Bank as an example of how digital technology can speed up banking. “This didn’t work in weeks and months. This happened in two days,” he notes, suggesting that AI could speed up such events even more.

The Way Forward

Although the author’s warnings are severe, he emphasizes that the solution is not to completely abandon AI. Instead, he advocates for more sophisticated switches and regulatory frameworks. He suggests implementing “cyber” approaches that could gradually slow market activity during times of stress, rather than implementing sudden shutdowns.

A call for balanced innovation

As financial institutions rush to implement AI systems, Rickards’ analysis serves as a timely reminder of the need for careful analysis of systemic risks. While AI provides powerful market analysis and risk management capabilities, we must ensure that these tools do not inadvertently make our financial systems more vulnerable to catastrophic failure.

The future challenge lies in harnessing the potential of AI while implementing safeguards against its systemic risks. As financial markets continue their technological transformation, finding this balance may prove crucial to global economic stability.