Technological advancements allow individuals to be more effective in their decision-making. It is undeniable that technological progress has contributed to the material well-being of individuals. But at what point does relying on technological instruments to make decisions become a serious problem? This becomes a serious problem when the decisions to be made involve financial matters such as investments in capital markets.
ChatGPT became one of these technological instruments that facilitate human communication. Following its release in late November 2022, the platform got more than 1 million followers only five days after its launch. Today, the platform has over 100 million active users two months after its launch.
The success of ChatGPT gave confidence to some high-finance experts to believe that it was even possible to invest in the stock market using the AI platform strictly. They argued that ChatGPT is capable of predicting stock market returns using sentiment analysis of news headlines.
This confidence is based on a paper published by Finance professors Alejandro Lopez-Lira and Yuehua Tang of the University of Florida, who indicated that the results of their research suggested that incorporating advanced language models into the investment decision-making process can yield more accurate predictions and enhance the performance of quantitative trading strategies. And this confidence has been passed down onto retail investors, who now use ChatGPT to select the stocks they are going to invest in.
While ChatGPT is absolutely useful in many aspects of our lives related to human communication, the reality is that relying on ChatGPT to invest in the stock market is a poor strategy for making sound investments.
ChatGPT is a language model, not a financial expert. It is trained on a massive dataset of text and code, but it does not have the same understanding of the financial markets as a human expert.
The results of the University of Florida study are not necessarily generalizable. The study was conducted over a relatively short period of time, and it is possible that ChatGPT's performance would not be as good over a longer period. And using ChatGPT to pick stocks is still experimental. There is no guarantee that it will be profitable in the long run.
The truth of the matter is that picking stocks requires the use of fundamental analysis, a thorough research on the companies one seeks to invest in. This means reading financial statements and 10-K reports.
Moreover, ChatGPT can be biased. The dataset it is trained on may contain biases that could affect its predictions. It can also be manipulated. Indeed, if someone knows how to manipulate ChatGPT's input, they could use it to generate false or misleading predictions. It must also be said that ChatGPT is not a replacement for human expertise. Even if ChatGPT is able to make accurate predictions, it is still important to have human experts who can interpret those predictions and make informed investment decisions.
What ChatGPT could be useful at, regarding investment decision-making process, is to predict stock movements but not stock prices. The whole purpose of using fundamental analysis in selecting stocks is to find the intrinsic value of the companies issuing the stocks one may be interested in investing.
Determining the intrinsic value of a company allows the investor to purchase the stock at a much lower price than what is reflected on the market, and ChatGPT lacks the capability to determine the intrinsic value of a company. Only human expertise could determine this.
Overall, using ChatGPT to pick stocks is a potentially risky investment strategy. It is important to weigh the potential benefits and risks before making any decisions.