Prediction machines, insurance, and protection: An alternative perspective on AI’s role in production

Ajay Agrawal, Joshua Gans and Avi Goldfarb

Journal of the Japanese and International Economies, 2024, vol. 72, issue C

Abstract: Recent advances in AI represent improvements in prediction. We examine how decision-making and risk management strategies change when prediction improves. The adoption of AI may cause substitution away from risk management activities used when rules are applied (rules require always taking the same action), instead allowing for decision-making (choosing actions based on the predicted state). We provide a formal model evaluating the impact of AI and how risk management, stakes, and interrelated tasks affect AI adoption. The broad conclusion is that AI adoption can be stymied by existing processes designed to address uncertainty. In particular, many processes are designed to enable coordinated decision-making among different organizational actors. AI can make coordination even more challenging. However, when the cost of changing such processes falls, then the returns from AI adoption increase.

Keywords: Artificial intelligence; Prediction; Decisions; Rules; Insurance; Protection; Coordination (search for similar items in EconPapers)
Date: 2024
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Working Paper: Prediction Machines, Insurance, and Protection: An Alternative Perspective on AI's Role in Production (2022)
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Persistent link: https://EconPapers.repec.org/RePEc:eee:jjieco:v:72:y:2024:i:c:s0889158324000030

DOI: 10.1016/j.jjie.2024.101307

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