Why Better Models Can Create Riskier Systems: Evidence from LLM Agents in Financial Markets

arXiv cs.AISeptember 7, 2026en

arXiv:2609.04373v1 Announce Type: new Abstract: Large language models (LLMs) are being deployed at scale in consequential real-world systems, from financial markets to content moderation to hiring. We show that improving individual model capability can degrade rather than improve system-level outcomes. We hypothesize that shared training and architectures can lead more capable LLMs to behave more similarly, creating correlated actions that do not diversify away. We develop a general framework showing how this correlation creates a non-diversifiable risk floor and test its predictions in financial markets using an agent-based simulation with LLM traders of varying general-purpose capability.

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