Will the GAI Using Restrict or Elevate Financial Market Volatility?
Authors: Kolomiets Andrey 
Published: January 2025

Objective: The Generative AI (the GAI) capabilities are far superior to the NI ones in risks detection and calculation. But for the uncertainty assessment traditional methods based on risk/profit calculation help badly. Meanwhile such assessment is the most complex task that the GAI faces in the financial market. Its decision may prevent destructive volatility in this market. But this subject investigated weak in literature. So, the paper focus on the uncertainty specifies and the GAI capabilities to assess these specifies.

Methods: The author used the method criticism of judgements originated by I. Kant. The application of this method is using in the paper includes content analysis of the semantic meanings of the conceptual apparatus (first of all, concepts of uncertainty and bounded rationality) that must be use for the GAI construction. Also, the application of this method includes verification of judgments used this conceptual apparatus according to the criteria of logical consistency and sufficient justification.

Results: Literature review shows that nowadays there are weak understanding of uncertainty specifies and limits of the GAI decisions under uncertainty. Moreover, if we are transferring to the GAI using in financial market, mentions in papers devoted to the GAI about uncertainty become relatively less. But the understanding of these specifies and limits need as for creation of effective the GAI models so for the GAI users. Therefore, the author highlights the main specifies of uncertainty are capable to elevate financial market volatility.

According the basic concept of the paper, the GAI is the imitation of the Human Intellect (HI), in which the HI intellectual capabilities multiply by inaccessible to the HI highly sophisticated algorithms, complexity and speed of calculations, and big data processing. Such a concept means the GAI in the financial market will imitate financial behavior of the HI which act under impact of bounded rationality, animal spirit, and investor herding. The GAI as the HI imitation ought to follow the same path in the financial market. The GAI, as the HI, faced uncertainty must be guided by bounded rationality and must combine two heterogeneous and opposite (as F. Knight stated) origins: risk calculation and uncertainty assessment. This combination is the base of the investing strategy choice. In the most cases such choice bases on logically incomplete judgments as implicit (or hidden) premises. Due to the fact that the GAI considers significantly more options, the range of positive and negative outcomes of decisions is much wider than the HI ones. Also, positive and negative externalities are larger.

Conclusion: The GAI is not able to eliminate the impact of the most important uncertainty specifies. Moreover, it generates additional uncertainty, systemic risks, and wide the potential of the financial market volatility. So, ones provide grounds for the conclusion that the scale of acceptable volatility of the financial market should be limited by the regulator more strictly than during the times when the HI dominated in markets. Such regulator policy will limit the margin rate, but will allow to maintain the financial market stability.