Prediction Machines: The Simple Economics of Artificial Intelligence

by Ajay Agrawal

Prediction Machines is not a recipe for success in the AI economy. Instead, we emphasize trade-offs. More data means less privacy. More speed means less accuracy. More autonomy means less control.

Economists view the world differently than most people. We see everything through a framework governed by forces such as supply and demand, production and consumption, prices and costs. Although economists often disagree with each other, we do so in the context of a common framework.

The rise of the internet was a drop in the cost of distribution, communication, and search.

What will new AI technologies make so cheap? Prediction. Therefore, as economics tells us, not only are we going to start using a lot more prediction, but we are going to see it emerge in surprising new places.

Prediction is the process of filling in missing information. Prediction takes information you have, often called “data,” and uses it to generate information you don’t have.

For example, as the computer industry began to take off in the 1960s and the cost of arithmetic began to fall rapidly, we used more arithmetic in applications where it was already an input, such as at the US Census Bureau, the US Department of Defense, and NASA (recently depicted in the film Hidden Figures

When prediction is cheap, there will be more prediction and more complements to prediction.

PREDICTION is the process of filling in missing information. Prediction takes information you have, often called “data,” and uses it to generate information you don’t have.

Being precisely perfect on average can mean being actually wrong each time. Regression can keep missing several feet to the left or several feet to the right. Even if it averages out to the correct answer, regression can mean never actually hitting the target.

In his book On Intelligence, Jeff Hawkins was among the first to argue that prediction is the basis for human intelligence. The essence of his theory is that human intelligence, which is at the core of creativity and productivity gains, is due to the way our brains use memories to make predictions: “We are making continuous low-level predictions in parallel across all our senses. But that’s not all. I am arguing a much stronger proposition. Prediction is not just one of the things your brain does. It is the primary function of the neocortex, and the foundation of intelligence. The cortex is an organ of prediction.”

Former Secretary of Defense Donald Rumsfeld once said: There are known knowns; there are things we know we know. We also know there are known unknowns; that is to say we know there are some things we do not know. But there are also unknown unknowns—the ones we don’t know we don’t know. And if one looks throughout the history of our country and other free countries, it is the latter category that tend to be the difficult ones.

“If you choose not to decide, you still have made a choice.” We handle many of our smaller decisions on autopilot, perhaps by accepting the default, choosing to focus all our attention on bigger decisions. However, deciding not to decide is still a decision.