Can generative AI help combat investing biases?
How investors can use AI tools to think more critically about their decisions.
By Samantha Lamas, Senior Behavioural Researcher
When making decisions, our minds rely on mental shortcuts, assessing new situations quickly based on our past experience. These mental shortcuts are often for the better, as they help us cut through the onslaught of information the world throws at us.
However, many of the mental shortcuts that make sense in everyday life don’t work well for long-term investing. In your day-to-day life, you should probably run away if you see everyone trying to escape from an unknown danger. Yet in investing, it usually behooves you not to follow the crowd. In everyday life, it’s reasonable to judge a restaurant based on your recent visit—but assessing an investment based on its recent performance is usually not recommended.
These examples of our shortcuts not working in financial decisions make sense. The problem is, when we are in the heat of the moment with markets going crazy, angry red numbers glaring at us, and sharp downward lines everywhere we turn, it’s hard to remember these examples. And it’s all too easy to give in to these shortcuts.
Luckily, we can turn to techniques from behavioral science—such as goal-generating exercises, values-prompting exercises, setting an information schedule, and creating trading rules—to address biases such as recency bias, temporal discounting, and confirmation bias, which can help combat these behavioral tendencies, many of which we’ve written about in the past. Moreover, with recent advances in generative artificial intelligence, investors may now use this technology as a tool to apply some of these techniques to think more critically about their decisions.
Generative AI as a “Thinking Tool”
“Generative AI” is a type of artificial intelligence that creates new content based either on what it has already learned or by using prompts entered by the user. Although gen AI is far from perfect (or accurate for that matter), it can still be helpful if used thoughtfully. There’s been an active online conversation regarding the use of generative AI as a “thought partner,” whether that be in the context of brainstorming for a work project or understanding a personal problem using therapist techniques.
An avenue I find especially interesting for the purposes of this article is using generative AI to assist in critical thinking. By using generative AI prompts to hypothesize scenarios, users can bypass their instinctive shortcuts, like the ones that get us in trouble with our finances.
Below are some prompts investors can use to think more carefully about their financial decisions using techniques from behavioral science. The prompts are organized based on the behavioral bias they can help address. They also can serve as a cue to remember our mind’s tendency to take shortcuts.
AI Prompts
Prompt yourself to consider the full picture.
Recency bias refers to our tendency to place undue importance on recent events when making decisions. Our minds naturally reach out to what happened most recently when predicting what will happen in the future. In investing, our natural tendency to focus closely on recent events can get us in trouble. Thus, it can help to have a “thinking partner” that nudges you to think outside of recent events. The following prompt can help with that. Insert your own situation in the brackets below.
I’m thinking of [example: transitioning more of my portfolio to cash given the uncertainty in the market right now]. What should I be considering before making this decision that I haven’t considered already? I want to make sure I’m considering the full picture when making this decision.
Prompt yourself to think more long-term.
Temporal discounting leads us to discount future needs in place of present-day needs and desires. Some research suggests this is because we feel psychologically disconnected from our future selves, to the point that our future selves can be seen as complete strangers. In investing, this can prompt us to ignore our long-term needs in favor of our present-day needs—for example, by making decisions that might make us feel better right now but could jeopardize our financial futures.
The following prompt can nudge us to extend our mindset by helping us imagine how a decision could impact our older selves.
I’m thinking of [example: transitioning more of my portfolio to cash given the uncertainty in the market right now]. I’m currently 35 years old. How might I regret this decision when I’m 65?
Prompt yourself to consider different perspectives.
Confirmation bias is our tendency to find and interpret information in a way that supports our opinion. Even if we try to engage in proper research before making a decision, our minds will automatically pay more attention to information that supports our current beliefs. In this context, a useful thinking partner will help us acknowledge and consider different perspectives.
I’m planning to [example: invest in crypto]. Take on the perspective of a person who disagrees with this decision. Give me your strongest arguments as to why this is a bad idea.
Wrapping Up
Biases have afflicted investors and affected their decisions since investing was invented. Thanks to behavioral interventions, technology, and literacy, investors have developed ways to overcome these tendencies. Using generative AI as a thinking tool—an extension of human thinking instead of a replacement—may be a helpful next step in our investing journeys.
