How AI Will Change the Way We Make Decisions

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How AI Will Change the Way We Make Decisions

With the recent explosion in AI, there has been the understandable concern about its potential impact on human work. Plenty of people have tried to predict which industries and jobs will be most affected, and which skills will be most in demand. (Should you learn to code? Or will AI replace coders too?)

Rather than trying to predict specifics, we suggest an alternative approach. Economic theory suggests that AI will substantially raise the value of human judgment. People who display good judgment will become more valuable, not less. But to understand what good judgment entails and why it will become more valuable, we have to be precise about what we mean.

Recent advances in AI are best thought of as a drop in the cost of prediction. By prediction, we don’t just mean the future—prediction is about using data that you have to generate data that you don’t have, often by translating large amounts of data into small, manageable amounts. For example, using images divided into parts to detect whether or not the image contains a human face is a classic prediction problem. Economic theory tells us that as the cost of machine prediction falls, machines will do more and more prediction.

Prediction is useful because it helps improve decisions. But it isn’t the only input into decision-making; the other key input is judgment. Consider the example of a credit card network deciding whether or not to approve each attempted transaction. They want to allow legitimate transactions and decline fraud. They use AI to predict whether each attempted transaction is fraudulent. If such predictions were perfect, the network’s decision process is easy. Decline if and only if fraud exists.

However, even the best AIs make mistakes, and that is unlikely to change anytime soon. The people who have run the credit card networks know from experience that there is a trade-off between detecting every case of fraud and inconveniencing the user. (Have you ever had a card declined when you tried to use it while traveling?) And since convenience is the whole credit card business, that trade-off is not something to ignore.

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