AI-Driven Alpha Decay: Algorithmic Homogenization, Reflexive Signal Erosion, and the Paradox of Intelligent Markets
A new research paper posits that the widespread adoption of AI in finance leads to a self-defeating cycle, significantly eroding investment returns. The study introduces the concept of an "alpha half-life," which dramatically shortens as more AI strategies are deployed, leading to homogenization and faster signal decay. This phenomenon, termed the Red Queen competition, suggests that while AI investment increases, net alpha can become zero, creating a fragility-efficiency tradeoff in market dynamics. AI
IMPACT AI adoption in finance accelerates signal decay and reduces investment returns, creating market fragility.