- The University , Education
- 21/03/2024
AI could significantly aggravate coming financial crisis
On Wednesday, March 20, professor of finance Albert Menkveld gave a lecture on the next financial crisis at the invitation of B&R Beurs and Studium Generale. That it is coming is certain, but he cannot say when exactly. “Sometime in the late 2020s or early 2030s.” He is worried that AI could accelerate and aggravate such a crisis. By developing a financial thermometer, he is trying strengthen our grip on an era that is increasingly spiraling out of control.
The Blauwe Zaal is packed, mostly with students. A generation that was probably still in diapers during the previous financial crisis (2008). “And that brings us to one of the risks of being human: we tend to quickly forget past misery. It fades away. Instead, we should learn from the past,” Menkveld believes.
The professor at Vrije Universiteit Amsterdam sees that we are quick to take risks again, even though back then, people had bought shares with borrowed money, resulting in serious consequences. “A mass sell-off ensued. We don’t know what the initial trigger was, but we saw that after the first sales, people wanted their borrowed money back. To that end, shareholders had to sell their shares, causing the prices of those shares to drop. This created a downward spiral.”
Risk factors
The use of algorithms among investors has been popular for quite some time, but since the emergence of ChatGPT, AI has really taken off. And that poses a risk, says Menkveld.
The professor of finance lists a few clear risk factors for the near future. “Firstly, the risk of using AI in the world of finance. If you had told me back in 2016 that AI would understand aspects of my lecture, I wouldn’t have believed you. Now, I do.”
“Not only does AI understand what I’m talking about, the technology is so advanced that it can even pick up on emotions, know my weaknesses and how to convince me of something. This poses a risk for investors to start buying or selling based on sentiment. Every time you talk to ChatGPT or a similar application, the system learns more about you. People are not sufficiently aware of that fact. Engineers are finding it increasingly difficult to keep track of exactly what AI is doing under the hood. That could become a problem in terms of gaining back control when things go wrong.”
Crypto
In addition to AI as an accelerator, Menkveld also mentions volatility as a risk. “Especially cryptocurrencies are extremely volatile. Even pension funds are looking to invest in crypto now. I hope my pension fund won’t do that.”
Beyond that, the professor says that tech-driven socials are something to watch out for. In January 2021, a short squeeze took place on the shares of U.S. video game retailer GameStop, with major financial consequences for certain hedge funds and heavy losses for short sellers as a result. The short squeeze was initially caused mainly by users of the subreddit r/wallstreetbets, an Internet forum on social news website Reddit.
With his lectures – he gives them regularly – Menkveld hopes to create awareness among people. “Low financial literacy is a very real problem. Especially in this day and age where young people are tempted by TikTok videos to invest in crypto. Those currencies could be worth nothing tomorrow.” Someone in the audience asks why this is not a problem for the euro or dollar. Menkveld: “Of course, there’s also a risk with those currencies, but that is precisely the reason why the central bank tries to keep inflation under control, so the currencies don’t lose value too quickly.”
Thermometer
“Every now and then, a sell-off wave hits the market, and a new one is definitely underway. The accelerating factors I mentioned could have an amplifying effect when things go wrong. That’s why we need real-time monitoring of crowded positions on the market.” To that end, he is working on developing a thermometer for the economy to see if we are slipping into a crisis and whether the tide can still be turned. “For this, we use data from supervisory body ECB. Large companies are not too keen on sharing their data with everyone, but they have to do so with the ECB. We are now working with the institution to develop this tool.”
Menkveld: “Investors all think they are unique in what they do, but in fact, a lot of people have similar portfolios. So if something happens to such a major player, it can cause a lot of damage and trigger a domino effect.”
When asked if he could be a little more specific as to what year he expects the next financial crisis to hit, he laughs. “If we knew that, we wouldn’t have them anymore.”
Would you like to learn more about this topic and the ethical dilemmas surrounding AI? Menkveld highly recommends the documentary “The AI dilemma”:
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