Biased Echoes: Generative AI Models Reinforce Investment Biases and Increase Portfolio Risks of Private Investors

20 Pages Posted: 8 Nov 2024

See all articles by Philipp Winder

Philipp Winder

University of St. Gallen

Christian Hildebrand

University of St. Gallen

Jochen Hartmann

TUM School of Management,Technical University of Munich

Date Written: September 26, 2024

Abstract

Generative AI models are increasingly used by private investors seeking financial advice. The current paper examines the potential of these models to perpetuate investment biases and affect the economic security of individuals at scale. It provides a systematic assessment of how generative AI models used for investment advice shape the portfolio risks of private investors. We offer a comprehensive model of generative AI investment advice risk, examining five key dimensions of portfolio risks (geographical cluster risk, sector cluster risk, trend chasing risk, active investment allocation risk, and total expense risk). We demonstrate across four studies that generative AI models used for investment advice induce increased portfolio risks across all five risk dimensions, and that a range of debiasing interventions only partially mitigate these risks. Our findings show that generative AI models exhibit similar "cognitive" biases as human investors, reinforcing existing investment biases inherent in their training data.

Keywords: generative AI, large language models, private investors, retail investors, financial portfolio risks, financial decision making

Suggested Citation

Winder, Philipp and Hildebrand, Christian and Hartmann, Jochen, Biased Echoes: Generative AI Models Reinforce Investment Biases and Increase Portfolio Risks of Private Investors (September 26, 2024). Available at SSRN: https://ssrn.com/abstract=4968821 or http://dx.doi.org/10.2139/ssrn.4968821

Philipp Winder

University of St. Gallen ( email )

Christian Hildebrand (Contact Author)

University of St. Gallen ( email )

Torstrasse 25
St. Gallen, 9000
Switzerland

HOME PAGE: http://www.ibt.unisg.ch/team/christian-hildebrand/

Jochen Hartmann

TUM School of Management,Technical University of Munich ( email )

Arcisstrasse 21
Munchen, 80333
Germany

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