Prediction Machines: The Simple Economics of Artificial Intelligence

by Ajay Agrawal

AI can lead to strategic change if three factors are present: (1) there is a core trade-off in the business model (e.g., shop-then-ship versus ship-then-shop); (2) the trade-off is influenced by uncertainty (e.g., higher sales from ship-then-shop are outweighed by higher costs from returned items due to uncertainty about what customers will buy); 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 (e.g., an AI that reduces uncertainty by predicting what a customer will buy tips the scale such that the returns from a ship-then-shop model outweigh those from the traditional model).