Hallucination in AI: Why It Is Risky for Investors - And How We Solved This Problem With FIBI

In our previous article, we explored the 7 pitfalls of Financial AI Chatbots. Today, let’s take a closer look at one of the most critical pitfalls: AI hallucination—and why it can have serious consequences for your investors.

What is a Hallucination in AI? 

AI hallucination happens when LLM-powered AI chatbots generate information that appears factual but is inaccurate, false, or entirely fabricated.

Hallucinations are not bugs—they’re inherent risks of how generative AI works. According to one of OpenAI’s recent tests, its newest o3 and o4-mini models have hallucinated 30-50% of the time.

Why does AI hallucinate?

• Flawed or Incomplete Training Data: If the model is trained on biased, outdated, or missing information, it may learn incorrect patterns and generate inaccurate results.
• Lack of Real-World Grounding: Most LLMs don’t verify facts against external sources. They might invent fake quotes, references, or summaries that sound believable but are false.
• Probabilistic Guessing: These models don’t “know” truth—they guess the most likely next word. That guess might look plausible but be completely wrong.

What are the Risks for Investors?

Misinformed  Investment Decisions

AI chatbots are increasingly used to analyze financial data, summarize reports, and predict market trends. However, if these chats produce hallucinated outputs—such as fabricated earnings figures or nonexistent news events—investors may make decisions based on false information, leading to potential financial losses.

Regulatory and Compliance Risks

Financial markets are subject to strict regulations. Relying on AI-generated information that contains hallucinations can result in non-compliance with disclosure requirements or other regulatory standards. This could lead to legal penalties, fines, or sanctions from regulatory bodies. 

Market Volatility and Systemic Risks

Widespread use of similar AI models among traders can lead to herd behavior, where many market participants make similar decisions simultaneously. If these AI systems share the same flaws or biases, hallucinations can propagate rapidly, amplifying market volatility and potentially leading to systemic risks. 

How to Mitigate Financial AI Pitfalls

AI Financial Assistants offer undeniable convenience—but convenience should never come at the cost of accuracy. As a financial service provider, how can you ensure the AI solutions you rely on deliver insights that are timely, trustworthy, and free from hallucinations?

When evaluating a financial AI vendors, critical questions include:

• Are they a credible source of investment research? 
• Do they have a proven track record for quality and/or historical performance monitored? 
• Are the data sources curated, reliable, licensed? 
• Have financial market experts trained or validated the insights? 
• Are there checks to prevent “hallucinations”?

To help you make an informed decision, we've put together a detailed checklist of key questions to ask when assessing AI Financial Assistant vendors.

Dowload the checklist here!

FIBI: Redefining the Standard for Financial AI

Our unique, closed format AI Assistant, FIBI, avoids these common chatbot pitfalls. Trained by Trading Central’s award-winning financial analysts and fed real-time market data, news, and social media, FIBI offers today’s investors with financial insights that are timely, actionable, compliant, and consistently trained. The closed format ensures users aren’t pulled through endless loops, asking only high quality, investing-specific questions—leading to more predictable and helpful responses.

Interested in adding FIBI to your research suite? Book a demo!