Prediction Machines

1. AI is fundamentally about cheaper prediction, not general intelligence

What Alexa was doing when the child asked a question was taking the sounds it heard and predicting the words the child spoke and then predicting what information the words were looking for.

Redefining AI. The current wave of artificial intelligence is not about creating human-like general intelligence, but rather about making prediction cheaper, faster, and more accurate. This shift in perspective allows businesses to cut through the hype and focus on practical applications. Prediction, in this context, means using available information to generate information that is not known.

Widespread impact. As prediction becomes cheaper, it will be used in more areas, including some that weren't traditionally seen as prediction problems. For example, autonomous vehicles reframe the driving task as a series of predictions about the environment and appropriate actions. This expanded use of prediction will lead to new products, services, and business models across industries.

Areas impacted by cheaper prediction:

• Fraud detection
• Medical diagnosis
• Language translation
• Customer service
• Supply chain management
• Financial forecasting

2. Prediction machines complement human judgment and action

Judgment is the process of determining the reward to a particular action in a particular environment. It is about working out the objective you're actually pursuing.

Human-AI collaboration. While AI excels at prediction, human judgment remains crucial in determining the relative value of different outcomes and actions. This complementarity means that as prediction becomes cheaper, the value of human judgment increases. Successful AI implementation requires understanding how to combine machine prediction with human judgment effectively.

Anatomy of decisions. To leverage AI effectively, businesses need to break down decisions into their components: prediction, judgment, action, and data (input, training, and feedback). By understanding this structure, organizations can identify where AI can add the most value and how to integrate it with human capabilities.

Key decision components:

• Prediction: What is likely to happen?
• Judgment: What is the relative value of different outcomes?
• Action: What should be done based on the prediction and judgment?
• Data: What information is needed to make and improve predictions?

3. AI tools reshape workflows and job responsibilities

AI tools may augment jobs, as in the example of spreadsheets and bookkeepers.

Job transformation. Rather than simply eliminating jobs, AI often leads to their reconfiguration. Tasks within jobs may be automated, added, or shifted in emphasis. This transformation requires businesses to rethink workflows and job designs to maximize the benefits of AI integration.

New skill requirements. As AI takes over certain tasks, the skills required for many jobs will change. Employees may need to develop new capabilities in areas such as data analysis, AI tool management, and higher-level decision-making. This shift emphasizes the importance of continuous learning and adaptability in the workforce.

Examples of job changes due to AI:

• Radiologists focusing more on complex cases and patient communication
• Financial analysts spending more time on strategy and less on data processing
• Customer service representatives handling more complex inquiries as AI handles routine tasks

4. Strategic AI implementation requires rethinking business models

AI can lead to strategic change if three factors are present: (1) there is a core trade-off in the business model; (2) the trade-off is influenced by uncertainty; and (3) an AI tool that reduces uncertainty tips the scales of the trade-off so that the optimal strategy changes from one side of the trade to the other.

Beyond operational efficiency. While AI can improve existing processes, its true strategic value lies in enabling new business models and approaches. Organizations need to consider how reduced uncertainty from better prediction might change fundamental trade-offs in their business.

Organizational transformation. Implementing AI strategically often requires changes beyond the specific tool or process being enhanced. It may involve restructuring teams, redefining roles, or even shifting the boundaries of the organization. Leaders must be prepared to manage this broader transformation to fully capture the value of AI.

Potential strategic impacts of AI:

• Enabling personalized product recommendations at scale
• Shifting from reactive to predictive maintenance
• Transforming pricing models based on real-time demand prediction
• Redefining customer segmentation and targeting approaches

5. Data strategy is crucial for AI success and competitive advantage

Data makes prediction better.

Data as a strategic asset. The quality and quantity of data available for training and operating AI systems can be a significant source of competitive advantage. Organizations need to develop strategies for collecting, managing, and leveraging data effectively.

Balancing data needs and privacy concerns. As the demand for data grows, businesses must navigate the trade-offs between data collection and user privacy. This balance will increasingly become a key factor in competitive strategy and regulatory compliance.

Key considerations for data strategy:

• Identifying valuable data sources within and outside the organization
• Developing systems for continuous data collection and quality assurance
• Ensuring data privacy and security
• Creating data sharing partnerships or ecosystems
• Balancing the use of proprietary data vs. publicly available information

6. AI adoption involves managing risks and ethical considerations

AI carries many types of risk.

Risk management. As AI becomes more prevalent, organizations must be aware of and manage various risks, including bias in AI decisions, security vulnerabilities, and unintended consequences of AI actions. Developing robust risk management frameworks specific to AI is crucial for responsible adoption.

Ethical considerations. The use of AI raises important ethical questions, particularly around fairness, transparency, and accountability. Organizations need to develop clear ethical guidelines for AI development and deployment, and be prepared to address societal concerns about AI's impact.

Key AI risks and ethical considerations:

• Algorithmic bias leading to unfair or discriminatory outcomes
• Data privacy and security breaches
• Lack of transparency in AI decision-making processes
• Unintended consequences of AI actions in complex systems
• Job displacement and economic disruption
• Concentration of power in companies with advanced AI capabilities

7. AI's societal impact creates complex policy trade-offs

The rise of AI presents society with many choices. Each represents a trade-off.

Balancing innovation and regulation. As AI's impact on society grows, policymakers face complex trade-offs between encouraging innovation and protecting public interests. This balance will shape the development and adoption of AI technologies across industries and geographies.

Addressing societal challenges. AI has the potential to both exacerbate and help solve major societal challenges, such as income inequality, job displacement, and privacy concerns. Policymakers and business leaders need to work together to develop approaches that maximize AI's benefits while mitigating its risks.

Key policy trade-offs:

• Productivity gains vs. potential job displacement
• Data-driven innovation vs. individual privacy protection
• AI-driven efficiency vs. market competition and antitrust concerns
• National AI competitiveness vs. international cooperation and standards
• Short-term economic gains vs. long-term societal impacts

Last updated: January 24, 2025