Artificial Intelligence in Financial Decision-Making: Opportunities, Risks, and Challenges

Abstract

Abstract Artificial intelligence (AI) has moved from a peripheral analytics tool to a core input in financial decision-making, shaping how institutions optimize portfolios, price risk, detect fraud, advise clients, and execute trades. This paper synthesizes recent academic literature, regulatory reports, and industry surveys (2020–2026) to examine the dual nature of AI adoption in finance: the strategic opportunities it creates and the risks and challenges it introduces. The review finds that AI materially improves predictive accuracy, operational efficiency, and access to financial services, with adoption accelerating sharply since the introduction of generative and agentic AI tools. At the same time, the literature converges on a consistent set of concerns: limited model explainability, algorithmic bias, cybersecurity and deepfake-enabled fraud, data privacy exposure, concentration and systemic risk from AI "monocultures," and a regulatory environment that has not kept pace with deployment. The paper presents a classification of AI application domains and associated risk categories, supported by quantitative adoption and market-growth data, and proposes a governance framework combining explainable AI, human oversight, and coordinated regulation. It concludes by identifying research gaps around long-term market stability effects, emerging-market adoption, and the governance of autonomous (agentic) financial AI. Keywords: Artificial Intelligence, Financial Decision-Making, Risk Management, Algorithmic Trading, Explainable AI, Financial Regulation, Agentic AI