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BlackRock's Robots Are Okay But Company's Increased Depenedence On AI Is Not

By Justin Lee , Apr 03, 2017 08:08 AM EDT
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BlackRock is replacing its human portfolio managers with AI robots. With that, a number of risks and effects are expected to happen. While it may not be surprising for the organization to turn towards artificial intelligence for its managing needs, this would put BlackRock at risk of experiencing what happened to Knight Capital from five years ago.

BlackRock To Potentially Follow Knight Capital's Footsteps

For the unaware, Knight Capital almost hit bankruptcy way back in 2012 due to its automated trading algorithm. Apparently, the AI in question made $440 million in bad trades in less than an hour. Forbes said that Knight Capital's tale is a cautionary story about the worst that can happen when companies rely their decision making on automated systems. The said incident is also a textbook-level example of what cognitive psychologists refer to as "automation bias".

Automation bias is people's tendency to not question the results provided by automated systems once the reliance has set in. So while BlackRock's AI department won't necessarily cost any fatal incidences, the company's increasing dependence on AI fund managers clearly poses risks for the company.

BlackRock's Decision To Shift To AI Has Benefits Too

Nevertheless, without considering the risks, BlackRock is expected to gain so much in its decision to shift to AI support. Research have shown that most human stock pickers are generally unable to match the market's performance as a whole. In fact, a massive fraction of three-quarters of all of the United States' stock mutual funds did not beat the market in the past ten years.

Artificial intelligence has a more reliable track record when it comes to picking investments. It also costs way less that its human counterparts. Reports say that shifting to AI will help BlackRock in lowering its ratio of cost to profits by 28 percent more or less. Nevertheless, this still does not remove the importance of having human systems checking on the work of AI to ensure that the worst case scenarios are avoided.

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