AI will help us achieve a better financial future through improved decision making

We have all heard the phrase that people are usually their own worst enemies when it comes to making financial decisions.

The human flaws that hurt our financial decision making are called behavioral biases. Researchers over the last 60 years, most famously Kahneman and Tversky, have documented our irrational mistakes and have concluded that they derive from our limited cognitive abilities (memory and information processing errors) and emotional tendencies (taking actions based on feelings).

When making financial decisions, we are affected by numerous behavioral biases. For example, because we have difficulty with uncertainty and filtering the excess amount of information we are bombarded with, we tend to default to inertia (AKA Status Quo Bias). And by suffering from this inertia, we tend to procrastinate acting on our financial plans.

Although it’s surprising and scary to think that humans are consistently subject to irrationality, an Artificial Intelligence class at Northwestern showed me that this problem might soon be solved. Experts have debated the concept of integrated intelligence, a partnership between humans and intelligent computers, as the future of AI. Both humans and machines have skills and deficits, and it’s in their union where we can achieve greatness. Applying this concept to our human deficits in the field of personal finance expands the horizon of new and possible tech solutions. With the simple question of “how might we create a system that is aimed at correcting a specific human behavior failing?” many solutions come to mind: intelligent saving, investing and lending based on your life goals, alerts on Amazon to help you with impulse buying.

In the real world, it seems that most players in the financial wellness space are currently focused in solving our inertia and self-control bias through intelligent automation. A great example is the company Digit, which optimizes how much to save everyday based on your income and spending patterns. Another is Wealthfront, a leading robo-advisor, that uses AI to analyze its clients’ spending and investing patterns to provide better customized advice and portfolio allocation.

For us, Kellogg MBAs looking to drive impact in Fintech, the good news is that there are many more behavioral biases to be solved. In my mind, loss aversion (feeling the pain of loss more acutely than the pleasure of gain), mental accounting (treating money differently depending in what “mental account” it is in: tax refund, birthday money, bonuses, salary) and relativity trap (making decisions based on easy available comparisons) are some of the other important biases that impact our daily decisions and that still need to be addressed.

MBA Strategists and Product Managers tasked with the opportunity of solving for a human behavior bias will be lucky, as they will essentially help us at a micro level make better decisions, have more discipline and hopefully improve our lives.

For those interested in the psychology of money, I highly recommend these resources for inspiration:

The Pain of Paying by Dan Ariely — Video

The Truth About Relativity by Dan Ariely — Video

Case Study: Improving Investment Behavior at Betterment

The Future of Wealth Management: Incorporating Behavioral Finance into Your Practice