Like many academics, Wharton marketing professor Wendy De La Rosa is excited about the transformative power of generative artificial intelligence. But as a researcher who focuses on financial well-being, especially among the most vulnerable consumers, she’s also waving a red flag.
In her latest co-authored paper, she cautions that AI can curb good financial decision-making for many people because it reduces the friction they experience when spending their hard-earned cash.
“We have to think about who is implementing the technology. By and large, that’s going to be businesses and retailers whose incentive is to get smarter, faster, and better at getting us to part with our money,” she said during an interview with Wharton Business Daily. (Listen to the podcast.)”When you think of individual human beings trying to fight against hundreds, if not thousands, of companies now equipped with artificial intelligence technology, there’s room for concern.”
“When we reduce that pain of payment, we tend to spend more, and our likelihood of purchasing increases.”— Wendy De La Rosa
De La Rosa’s paper centers on “pain of payment,” a behavioral economics term that refers to the negative emotions people feel when they spend money and lose financial resources. It’s the reason why consumers generally put more thought into purchases made with cash compared with a credit card. But all the tools of gen AI are designed to encourage consumer spending with a click, a tap, a wave, or a fingerprint.
“All of the sudden, we’re disassociating this loss of monetary resources from the act of paying, which reduces that pain of payment,” De La Rosa said. “When we reduce that pain of payment, we tend to spend more, and our likelihood of purchasing increases.”
Modeling How AI Alters Financial Decision-making
In the paper, De La Rosa and co-author Christopher Bechler, marketing professor at the University of Notre Dame’s Mendoza School of Business, introduce a framework they call the AI-IMPACT model to examine how AI affects the marketplace and consumer decision-making. They note four particular pathways:
- Access: Algorithms can help consumers by reducing bias and discrimination, which can increase credit access to underserved populations. Or algorithms can exacerbate bias and make financial inclusion even more difficult for people on the margins.
- Personalization: AI can help firms target consumers with tailor-made choices, including lower prices for preferred customers. Optimized personalization may seem like a win, but the professors caution that it will lead to greater consumer spending overall, which can decrease financial well-being.
- Flexibility: AI allows firms to be flexible in their pricing, payment methods, and points of sale. All these decrease barriers to spending.
- Automation: AI helps consumers automate many of their spending and investing decisions, which can reduce financial literacy over time as people relinquish decision-making. On a larger scale, automation will result in job contraction, affecting incomes and spending.
“No one is going to go to industry and say, ‘Hey, you need to be less profitable.'”— Wendy De La Rosa
Humans are wired to adapt and respond to their changing environments, De La Rosa said. That’s why she’s concerned about how AI will permanently alter the way people think about their money and spending habits. The paper calls for additional research into how AI is reshaping consumer behavior, and De La Rosa thinks public-private partnerships will be critical in solving some of the challenges because very few entities are designed to safeguard financial well-being.
“I don’t know that we have a silver bullet or answer, because clearly no one is going to go to industry and say, ‘Hey, you need to be less profitable,’ or ‘You need to focus on less technological advancements that are going to increase consumer spending,'” she said.
