What is Hallucination?
Hallucination occurs when an AI model generates information that appears plausible but is factually incorrect or entirely fabricated. In financial services, hallucinations pose significant risks because they can lead to unsuitable advice, regulatory breaches or misleading client communications. Techniques such as Retrieval Augmented Generation, strict prompting, output validation and human review are used to minimise hallucination risks and ensure AI-generated content is grounded in verified information.
Hallucination in financial services
For advice firms, lenders and insurers, the practical safeguard against hallucination is a combination of grounding outputs in approved source material, validating key facts automatically and keeping a qualified person responsible for anything that reaches a customer or a regulator.