Stop Worrying That AI Will Cause the Market to Crash

tech.hindustantimes.com:

According to Gary Gensler, chair of the SEC, a market crash caused by artificial intelligence is “nearly unavoidable.” Like many other regulators, he has called for new regulations on AI to prevent such dire scenarios. Such fears are considerably exaggerated. It is true that AI might cause a market crash — just as many events, some of them quite arbitrary or unexpected, have led to market downturns. On net, though, AI probably lowers the chances of a market crash.

One fear is that a small number of AI base models could lead investors to herd behavior, where many of them sell (or buy) at the same time because their models have told them to. But the number of base models is likely to rise over time, not fall. AI is in a period of considerable innovation, with many startups being founded and many new trading and investing techniques being developed. Diversity, not uniformity, will reign.

The incentives of a trading firm are not to use the same model as everyone else, as that could lead them to sell into falling market panics or buy into temporarily rising prices — which is precisely what they should not do. Instead, a top trading firm will try to develop better models than its competitors. If a firm discovers that competitors are using a common model in a predictable way, it can identify the weaknesses of that model and trade against those firms.

Insofar as regulators exert influence and try to exercise more control over the market, they raise compliance costs and impose legal burdens on firms. That favors larger incumbents, whether in the trading market or in the provision of AI services. In other words, regulation tends to decrease rather than increase the number and diversity of techniques and programs in the market. That