Many of us have belatedly realized that we’ve already entered the age of AI. For years, Google algorithms have decided what comes up first in response to our queries. Amazon does likewise recommend new products. Social media and entertainment apps like Netflix and Spotify use AI in the same way. Machines can learn about us effectively enough to anticipate what we want, adding value to products and services. Yet AI has also received widespread backlash in recent years, as people decry not only its intrusion into personal data but the ethics of its deployment in real-life applications.
Algorithms have been used behind the scenes in finance for a long time. Today, credit scores can factor not only your payment history but even telco usage data and location patterns. We don’t pay attention when AI does its job invisibly, as long as the system works. But that’s changing now as the power of financial AI enters the hands of the individual consumer.
AI and personal finance
In a 2020 Accenture study, it was found that over half of customers wanted their banks to provide tools that can monitor real-time spending, helping them stay within budget. 41% were also open to insights and advice generated by their banks’ algorithms. And in many ways, technology is already stepping up to address those demands. Bank of America’s virtual assistant Erica was rolled out in 2019 and amassed over 1 million users within 2 months. Essentially a chatbot, Erica can perform basic online banking tasks on command and alerts you when your spending is getting out of hand. And the more users interact with the AI, the more it learns about them, helping to improve its functions. Similarly, the mobile app Olivia AI can draw upon your personal finance and geographical data to analyze your spending patterns. While its basic function is an all-in-one account manager, the app can provide recommendations to improve your spending habits. It also notifies you if, for instance, shopping on a certain day or at a specific store will yield lower prices. Then there are “robo-advisors” for interested investors. These platforms use algorithms to crunch your financial data and goals, develop investment advice, and automate your allocation of funds. These tasks would normally be carried out by a personal finance advisor, but the AI does it for you at a fraction of the cost.Underlying biasThese examples of personal AI hold considerable promise for improving anyone’s financial management. The fact that algorithms have already been used for years within financial institutions lends strength to that. But we need to understand why such demand exists in the first place. Almost one-fifth of US households spend more than they earn. Others don’t have enough saved for retirement or an emergency. Too often, we use debt as a tool to address the needs of the present without considering its long-term impact on our future. The underlying issue is one of human bias. Our financial decisions are subject to emotions, cognitive biases, and the craving for instantaneous rewards over delayed gratification. Having an AI assistant lets you cut through all those biases clouding your judgment. The algorithm may learn a lot about you, but it won’t cut you any slack when it paints a picture of expenses versus incomes. Confronted with stark reality, we’re more inclined to make unpalatable yet financially sound choices.
On the other hand, the problem with AI as a personal finance tool is that it can become a crutch. By foisting our need for objective, data-driven decision-making on the algorithm, we lose our agency in the process. We also risk having our personal goals misconstrued by machines, which, programmed as they were by flawed humans, can still prove fallible in their interpretation of what we want. Personal financial management is a skill. It’s hard to develop because it requires both financial literacy and the discipline to act accordingly. Having an AI-powered tool on your phone, or popping up whenever you log in to your bank’s website, is an excellent way to simplify complex decisions. Its grasp of your financial past and current picture can’t be matched. On-demand, it can tell you about every purchase decision you’ve made on the record and how you can adjust. But you still need to exercise financial discipline on your own. And if you dispense with the AI, do some research, or talk to a human professional, you might come up with unique measures to combat specific money problems. Just like any tool, AI in personal finance can be effective if used with the appreciation of its capabilities, why it works, and where it doesn’t.