Can AI Make Financial Decisions?
AI is changing every single day. It’s no surprise that people use search engines less and AI more. The real question is, can AI make financial decisions, or at least help you make financial decisions?
In a world obsessed with automating, reducing, or eliminating work, we have to ask the important questions. Yes, AI can give you basic information. Yes, AI can solve small problems, but does AI really have the power… Can AI make financial decisions for you?
Can AI Make Decisions About Your Financial Situation?
It’s important to note that there are two categories of things to discuss today. The things AI definitely can do, and the things AI can’t really do, yet.
AI has gone from a speculative idea to an actual reality. It doesn’t walk around doing manual labor perfectly (though robots like that do exist), but it does creep into all the little things. We use it every day, whether we realize it or not.
If you don’t use chatbots on a regular basis, you may think that you don’t use AI, but you’d be wrong. AI is used in getting that insurance quote, in contacting customer service, or when reading a news article. Many search engines automatically use what they call an AI summary.
At this point it is inescapable.
What are the things it can do, more specifically what can AI do to help us make better financial decisions?
What Can AI Make Financial Decisions About?
I have been using AI a lot recently. It helps make a morning routine, a lifting schedule, and even helped me prepare for my New Years goals. All of those things are pretty low stakes, so how can AI help us with our finances?
Creating Basic Financial Plans
Finance is a complicated subject. There are millions of financial professionals that focus on different areas of finance (insurance, investments, retirement planning, corporate financial planning, etc.).
What AI excels at is creating tailored and basic financial plans. You can ask for a budget, financial goals, and even a detailed financial plan. AI delivers fast and somewhat realistic ways for you to take control of your finances.
You need to make sure to prompt it right and give it relevant information before it can adequately assess your situation and give recommendations. For example, you may need to share your income, your current expenses, where you live, and any other hidden details. The more detailed your information, the better AI can meet your needs. If you need specific tax advice or investment advice many chatbots will direct you towards professionals (which is good).
Helping Evaluate Big Purchases
The other day I slipped on some ice and my car ended up in the ditch. Long story short, I needed a new car and different insurance. Car shopping is not an easy task, and I would recommend doing your own research and not relying on AI completely, but AI played a huge role in helping me evaluate my options and helping me with insurance.
If you’re making a big purchase, AI can easily find the best recommendations for your situation. In my case, I wanted an all-wheel drive vehicle that could easily last to the 250,000 miles marker. I got recommendations on make and model, and what years to avoid. I got recommendations on pricing and how to find a good deal.
Eventually, it even helped me negotiate
Automated Savings, Investing, and Tracking
There are many AI apps that are perfectly designed to create, track, and maintain a budget. If you’re sick of going through credit card statements and adding your expenses into a spreadsheet, then AI certainly has an answer.
Not only can AI track your spending, but it can also give you alerts, automate savings transfers, and automatically allocate investment funds into ETF’s and index funds. Often referred to as roboadvisors, there is AI that can execute all your investment transactions and follow your investment plan. It takes away all manual barriers to sound investing from lack of time and knowledge.
So now what, is it going to cook me breakfast and make my bed?
If you still like the old way, give this article a read:
How to Budget as a Broke College Student: 3 Crucial Things
What AI Can’t Make Financial Decisions About (Yet)
With all of AI’s benefits it’s easy to think you can use AI for anything. Unfortunately, we can’t all quit our jobs and have AI do our work for us. While powerful, AI still has its limitations.
For one, AI is only as good as the data it’s fed. If there are errors in the data (sources, research, websites, etc.) then there will be errors in its output. For example, if AI tells you to withdraw 4% of your retirement portfolio because of research done 40 years ago, then it might put you in a rough position.
Secondly, AI is only as good as the user inputs. Yes, some AIs are in the background, but a lot of them are dependent on user inputs. If I prompt a chatbot in the wrong way, the output can be drastic. For example, if I say that I am going to retire in 10 years, how much do I need to have invested?
The AI may give me a reasonable number, but it will use assumptions. You must give it information on your age, residence, and current expenses. Someone retiring at 70 in Iowa, is entirely different than someone retiring at 45 in New York.
One Important Cavet to AI
With everything said above, you probably think I hate AI or think it’s seriously flawed. Neither of which would be true. AI is a tool, and those who know how to use it can have AI improve any aspect of their life.
Estate and Will Planning
Some people are young and don’t think about death at all, where others fear it like the plague. The reality is, that the death rate is 100%. Eventually we have to decide where our belongings go to. Family? Friends? Kids? Spouse? And in what order?
AI can be used as a tool to get a rough outline or give you ideas, but a lawyer should always be consulted when conducting series legal matters.
There are moving pieces and considerations that another human being will have greater judgment on than AI. Along with that, while lawyers can also be heartless (like AI), they are also human, which is essential for the empathetic needs of creating a document like this.
Investment Advice
While AI has come a long way, there are factors that AI simply has a hard time properly quantifying. People’s emotions play a huge part in their financial trajectory and the trajectory of the market.
Unfortunately, while the rational market theory is sound, while, in theory. It doesn’t hold true, because it doesn’t accurately assess human unpredictability. For example, AI would not have had insight into the Covid-19 bear market, before it happened.
Because of AIs inability to accurately quantify emotions, of the market and of the individual investor, you’ll be hard pressed to get really specific advice. It can tell you the same stuff every financial book does, and someone’s opinion form CNBC Money, but it can’t tell you how to invest based on your personality, emotions, and the emotions of the market.
Didn’t you say roboadvisors were AI that invested? Yes, I did.
Roboadvisors are a bit different because they are specifically tailored and limited in their operating abilities. You won’t hand your money to a roboadvisor and find out that they found the new Apple and invested all your money into it. The leash on roboadvisors is short, however, it is important to note that many hedge funds do use AI models to generate huge profits.
Sadly, that’s for the big dogs and not us.
AI Spending Limits
AI ultimately can’t make direct decisions for you. While it can tell you that you overspend on food or have too many subscription services, it can’t stop you from spending money. Yes, you can put locks on your spending and AI can assist, but AI isn’t going out to eat for you, and it isn’t shopping for you.
Eventually it boils down to human intervention of our own habits. AI can’t break our habits; it can only help us break our habits.
So, I guess humans are the problem after all.
Can AI Make Financial Decisions?
The simple answer is yes, but it varies based on the complexity of the financial decision and the control desired by the user. AI can lessen the load of financial decision making, but it can’t necessarily perform all actions for you.
Putting it All Together
If you’ve made it this far you know that AI can make financial decisions. Now this doesn’t mean you let it take the wheel, and you never have to drive again. Think of AI more like adaptive cruise control. You’re still at the wheel calling all the shots, choosing when to merge, where to turn, and what exits to take, but it takes away the tedious pain of controlling the gas pedal.
AI is changing the world every single day, are you going to let it change your world, or just those around you?
Take some time to try out a few chatbots, or download an AI powered budgeting app. Once you see the light, you can’t unsee it.
Until the next article.
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**Hi, I am your author Ryan Lisota, and I am on a journey to educate students of all ages. I am young, just like you and I have a goal to be on Forbes 30 before 30. Help me make that dream come true by reading another article here or subscribing to my newsletter here.**
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