Financial services, like many institutions, are losing Americans’ trust. That’s a problem. Economies depend on a healthy financial system, as became painfully evident during the 2008 financial crisis, and that system operates largely on trust—confidence that people can access the money in their bank accounts, that their investment accounts are secure, and that their trades will be filled at quoted market prices, to name just a few everyday financial interactions.

But building confidence in financial services is tricky. Financial systems are technical and complex and therefore somewhat opaque, and that opacity erodes trust. Financial technology from online trading and blockchain to mobile payments and banking has the potential to make financial services more transparent and trustworthy, but it’s not yet clear if, or to what extent, those innovations are making a difference.

Take blockchain, for example. Its proponents argue that trust isn’t necessary because a decentralized network of computers verifies and collectively stores transactions, making the record tamper-proof. Even so, I suspect few people understand how blockchain works, or how to mine or store digital coins.

That may explain why many investors own cryptocurrencies through financial intermediaries such as crypto exchanges and banks, or more recently, exchange-traded funds, all of which require no less trust than traditional financial services.

Now add artificial intelligence to the mix. AI could conceivably make financial services more accessible but also less transparent.

To better understand how these new technologies might affect our trust in the world of finance, Nir Kaissar, a Bloomberg Opinion columnist, spoke to Myron Scholes, who, together with Robert C. Merton won a Nobel Prize in economics in 1997 for a method to determine the value of derivatives and has been thinking deeply on the subject of trust for decades. What follows is a lightly edited transcript of our correspondence:

Nir Kaissar: Myron, how would you characterize the level and directionality of trust in financial services?

Myron Scholes: In my view, lack of trust and uncertainty go hand in hand. It is difficult for investors to separate the truth from fiction. Uncertainty masks the truth. Many products are offered to investors showing high rates of return.

Although there are always caveats claiming that future returns are not guaranteed and could differ from past results, how is the investor to know whether the results shown are not data-mined—found by searching the past for the best results or seeding a bunch of alternatives and then showing actual results on the best of them that randomly generated good returns?

Increases in the levels of uncertainty in the financial system have led to an erosion of trust, especially when the promised good results don’t materialize. Tail events or downside shocks expose products that suffer large losses in bad times while making smaller gains most of the time.

To garner extra returns, investors have sold put options that need to be paid off with market drawdowns. With higher levels of uncertainty, products are offered that make promises that have a low probability of success. This makes it difficult and costly for honest product providers to distinguish themselves from the cheaters. Many products that should be developed for investors are not. It becomes too costly to build trust.

Nir Kaissar: In that regard, new financial products, which are almost always marketed as an improvement, run the risk of making it harder for investors and consumers to navigate the financial system. One example is the explosion in the number of ETFs in recent years. That raises the questions: Is financial technology building or eroding trust in financial services? And does fintech make trust more or less important?

Myron Scholes: All new innovations precede the infrastructure to govern them. Under uncertainty, it is difficult to ascertain which innovations will be successful. It would be too expensive for financial institutions to set up all the controls and constraints that eventually come into being for successful products that demonstrate sustainability. This means that newer projects attract cheaters to game the system.

We saw that recently with cryptocurrencies and the many coins that were developed and failed. We see that with the rush into AI-generated financial solutions and products. Financial (or business) innovations are brought forward if they can provide services faster, more individualized, and more flexibly.

With more uncertainty, flexibility gains value, offering the ability to change with changing circumstances and new desired outcomes. With technology, financial companies can offer services more tailored to satisfy a given investor or provide a specific solution, rather than to focus on selling a particular product.

Moreover, no one wants to wait too long for a solution to their problem. Some other financial entity will provide it soon. Speed, individualization and flexibility are cornerstones of innovations if they can be provided at a lower cost.

Technology facilitates each of these. But the move to more of a focus on solutions requires trust. Individuals must trust their financial advisers, who have more acumen than they do, to design and implement the solution and allow for flexibility as needs change.

This is objective-based, client-focused, a bottoms-up and not a top-down approach. This is where financial innovation and services are heading. Fintech is facilitating this evolution.

Nir Kaissar: So, how do we reconcile the uncertainty created by new financial products with the higher level of trust that these new, technology-based products require? How should financial services companies build trust, and what role does technology play?

Myron Scholes: Technology is a tool to innovate and to monitor. Institutions that have a long history of innovations that monitor cheaters and control their offerings are more likely to be successful. To maintain trust, their rate of innovation will most likely be slow and monitored. They will educate clients. They will be cautious. They need to protect their reputations. They put constraints on the innovation process. This takes longer for the educational process to unfold and the rollout of new services is slower and less flexible.

Financial technology helps the education and trust-building process within and outside entities. Learning and trust building need to occur within organizations. Learning occurs from one-on-one communication from entity to client and from fellow investors to fellow investors.

Clients compare across financial entities. Most advisers interact with clients to educate and understand their requirements to fashion solutions for them. They use the reputation of their firms to grow and maintain client relationships. They use the track records of similar offerings to build trust.

New technology and new innovations, however, can break through the governing constraints of old infrastructure by providing more idiosyncratic services faster and more individualized.

Older in-house infrastructure may be far more costly than newer fintech. Clients trade off the lower-cost offerings of new innovators with the cost of developing trust to use those new offerings. With success, the new offerings displace the old and the cycle repeats itself.

2024 Bloomberg L.P. Distributed by Tribune Content Agency, LLC.

A high-ranking executive at OpenAI who served a few days as its interim CEO during a period of turmoil last year said she’s leaving the artificial intelligence company.

Mira Murati, OpenAI’s chief technology officer, said in a written statement Wednesday that, after much reflection, she has “made the difficult decision to leave OpenAI.”

“I’m stepping away because I want to create the time and space to do my own exploration,” she said.

Two other top executives are also on their way out, CEO Sam Altman announced later Wednesday. The decisions by Murati, as well as OpenAI’s Chief Research Officer Bob McGrew and another research leader, Barret Zoph, were made “independently of each other and amicably,” Altman said in a note to employees he shared on social media.

They are the latest high-profile departures from San Francisco-based OpenAI, which started as a nonprofit research laboratory and is best known for making ChatGPT. Its president and co-founder, Greg Brockman, said in August he was “taking a sabbatical” through the end of the year. Another co-founder, John Schulman, left in August for rival Anthropic, founded in 2021 by a group of ex-OpenAI leaders.

Yet another co-founder, Ilya Sutskever, who led a team focused on AI safety, left in May and has started his own AI company.

Days after Sutskever’s departure, his safety team co-leader Jan Leike also resigned and leveled criticism at OpenAI for letting safety “take a backseat to shiny products.”

Murati spoke positively of the company and Altman in a departing note to colleagues shared on social media, describing it as “at the pinnacle of AI innovation” and saying it’s hard to leave a place one cherishes.

Altman expressed his gratitude for Murati’s service and said leadership changes are natural for a fast-growing company.

“I obviously won’t pretend it’s natural for this one to be so abrupt, but we are not a normal company,” Altman said in a post on X that also announced that six other people were taking new roles.

Murati was suddenly catapulted to be the company’s interim CEO late last year after the board of directors fired Altman, sparking upheaval in the AI industry. The company later brought in another interim CEO before restoring Altman to his leadership role and replacing most of the board members who ousted him.

© 2024 The Associated Press. All rights reserved. This material may not be published, broadcast, rewritten or redistributed without permission.

“League of Legends” is caught in the middle of a dispute between Hollywood’s actors union and an audio company that provides voiceover services for the blockbuster online multiplayer game.

The Screen Actors Guild-American Federation of Television and Radio Artists called a strike against “League of Legends” on Tuesday, arguing that Formosa Interactive attempted to get around the ongoing video game strike by hiring non-union actors to work on an unrelated title.

Formosa tried to “cancel” the unnamed video game, which was covered by the strike, shortly after the start of the work stoppage, SAG-AFTRA said. The union said when Formosa learned it could not cancel the game, the company “secretly transferred the game to a shell company and sent out casting notices for ‘non-union’ talent only.” In response, the union’s interactive negotiating committee voted unanimously to file an unfair labor practice charge against the company with the National Labor Relations Board and to call a strike against “League of Legends” as part of that charge.

“League of Legends” is one of Formosa’s most well-known projects. The company provides voiceover services for the game, according to SAG-AFTRA.

SAG-AFTRA has accused Formosa of interfering with protections that allow performers to form or join a union and prevent those performers from being discriminated against—a move the union called “egregious violations of core tenets of labor law.”

Formosa did not immediately respond to a request for comment. “League of Legends” developer Riot Games said that the company “has nothing to do” with the union’s complaint.

“We want to be clear: Since becoming a union project five years ago, ‘League of Legends’ has only asked Formosa to engage with union performers in the U.S. and has never once suggested doing otherwise,” Riot said in an emailed statement. “In addition, we’ve never asked Formosa to cancel a game that we’ve registered.”

SAG-AFTRA’s allegations are related to a non-Riot game, the game publisher said.

“It’s bad enough that Formosa and other companies are refusing to agree to the fair AI terms that have been agreed to by the film, television, streaming, and music industries, as well as more than 90 other game developers,” said the union’s national executive director, Duncan Crabtree-Ireland. “To commit illegal unfair labor practices is beyond the pale and won’t be tolerated by SAG-AFTRA members.”

SAG-AFTRA members must immediately stop providing covered services to “League of Legends,” the union said. Until Tuesday, the game was one of several titles that remained unstruck. Formosa is a union signatory.

“League of Legends is a game of champions. Instead of championing the union performers who bring their immense talent and experience to beloved characters, decision-makers at Formosa have chosen to try to evade and abandon them,” said Interactive Media Agreement Negotiating Committee Chair Sarah Elmaleh. “Such double-dealing is very disappointing from a longtime committed union signatory.”

SAG-AFTRA called a strike against major game companies in July after more than a year of negotiations around the union‘s interactive media agreement broke down over concerns around the use of unregulated artificial intelligence. Formosa is a member of the bargaining group in those talks.

© 2024 The Associated Press. All rights reserved. This material may not be published, broadcast, rewritten or redistributed without permission.