Artificial Intelligence and the Disparities in Investor Return

Iris Z. Shen; Lanjing Zhang

doi:10.53941/tai.2025.100007

Abstract

Individual investors often trail institutional ones in investor return. Artificial intelligence (AI) has been increasingly used in investing and finance sectors. However, its impact on the disparity in investor returns is unclear. We therefore discuss how and to what extent the application of AI tools exacerbates return disparities between individual and institutional investors. Literature search and review were conducted. Hypothetical drawdowns during 2020 market crisis were simulated and reported. Our data and review of literature show that AI may worsen these disparities through additional technological and psychological edges gained by institutional (versus individual) investors and large (versus smaller) institutions. To address this concern, we propose several approaches to mitigate the increasing disparities in investor return, including increasing awareness of the risks of AI-driven tools, playing defensively in the market, actions by the law makers and law enforcement agencies and fiduciary requirement of financial advisors and brokers. However, there are several exceptions to the increasing disparities that may help individual investors and those in small institutions. In summary, AI tools will likely increase the disparity in the investor return between individual and institutional investors and that between large and smaller institutions. Yet we believe that these disparities can be prevented or mitigated through collaborative efforts of the investors, public, academics, and government officials.

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