A double-edged sword that could trigger a market crash

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

“There is such euphoria: tens, even hundreds of billions of dollars are being spent on AI. Every major investment bank on Wall Street is implementing it,” says Jim Rickards, author of the new book Money GPT. However, he controversially argues that widespread adoption of AI in financial markets could amplify market crashes beyond anything we have seen before.

Composition error

Rickards offers a compelling concept called the “fallacy of composition,” which argues that actions that make sense for individual market participants can turn out to be disastrous if they are adopted by everyone. He illustrates this with an analogy: “At a football match, one fan, standing, gets the best view. It really works. The problem is that everyone behind them gets up and soon the whole stadium is on their feet and no one has a better view.”

In financial markets, this phenomenon can occur during market downturns. While it would make sense for individual investors to sell during a crash, if artificial intelligence systems controlling vast amounts of capital were to apply the same strategies at the same time, the result could be disastrous.

The missing human element

The author argues that one of the most significant risks comes from removing human judgment from the equation. He points to the historical role of the New York Stock Exchange specialists, who were tasked with maintaining order in the markets: “The specialist had to confront the market when there was a wave of sellers… to try to balance the market. “Today’s artificial intelligence systems lack such subtle human judgments,” he said.

Speed ​​and synchronicity: a dangerous combination

While market panics are nothing new, AI carries unprecedented risks due to its speed and synchronicity. The automated nature of AI-driven trading can accelerate market movements and create feedback loops that might otherwise be interrupted by human traders. As Rickards warns: “What is new is the speed with which they can occur, the reinforcing effect and the recursive function.”

Beyond market crashes: the banking system is under threat

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

The way forward

Although the author’s warnings are dire, he emphasizes that the solution is not to abandon AI entirely. Instead, he advocates for better circuit breakers and regulations. He proposes “cybernetic” approaches that could gradually slow market activity during periods of stress, rather than a sudden stop.

A call for balanced innovation

As financial institutions rush to implement artificial intelligence systems, Rickards’ analysis serves as a timely reminder of the need to carefully consider systemic risks. While artificial intelligence offers powerful capabilities for analyzing markets and managing risk, we must ensure that these tools do not inadvertently make our financial systems more vulnerable to catastrophic failures.

The challenge ahead is to harness the potential of AI while protecting against its systemic risks. As financial markets continue their technological transformation, finding this balance may prove critical to global economic stability.