Risk Modeling

CHAPTER 1Introduction

“By far, the greatest danger of Artificial Intelligence is that people conclude too early that they understand it.”

—Eliezer Yudkowsky

No doubt, we, as a society, are entering into new advances in technology at ground-breaking speed. The rapid growth in digital data and advances in computing power open endless possibilities for transformation in every sphere of life. At the same time, these developments are also driving unparalleled change in human behavior, consumer demand, and expectations. It is believed that we are now entering the next wave of revolution: the fifth industrial revolution or the age of artificial intelligence (AI). In this age, it is said that machines are truly capable of varying degrees of self-determination, reason, and “thought,” working with humans in unison. As a technology, AI is pervasive in every industry, including financial services. It is also starting to mature as a useful tool in risk management function.

However, AI is a broad term and defined by various industry bodies in different ways. The Oxford Dictionary defines it as “the theory and development of computer systems able to perform tasks normally requiring human intelligence, such as visual perception, speech recognition, decision-making, and translation between languages.”¹ The European Union defines it as “systems that display intelligent behaviour by analysing their environment and taking actions—with some degree of autonomy—to achieve specific goals.”² The ...