Think Twice Before Trusting Your Funds with ChatGPT

ChatGPT: Can the Chatbot Predict Stocks?

ChatGPT, the chatbot that has already made its way into different work domains, is now being tested as a fund manager. Companies are even working on their own LLM to stay relevant. According to a report by Finder, ChatGPT picked a theoretical stock portfolio of 38 companies outperforming the S&P 500. ChatGPT’s funds outperformed real funds in 34 out of 39 market days. But, does this experiment qualify ChatGPT as a reliable fund manager?

Decoding ChatGPT Prediction

A research paper released last month studied whether ChatGPT and other large language models can forecast stock price movements and return predictability. Predictability tools work on the principle of sentiment analysis. In the study, ChatGPT was used to indicate whether a business news headline is good, bad, or irrelevant for determining a firm’s stock price. Numerical scores were computed and a positive correlation between these ChatGPT scores and daily stock market returns were documented. ChatGPT outperformed traditional sentiment analysis methods, and other basic models such as GPT-1, GPT-2, and BERT were not able to accurately forecast returns, indicating that complex models were able to predict better.

ChatGPT Fund Monitoring

Finder monitored the ChatGPT fund over two months, selecting a stock portfolio from high-quality businesses with criteria such as minimal debts, sustained past growth, and assets that provide a competitive edge. Some of the companies that ChatGPT picked were Meta, Microsoft, Intel Corporation, Alphabet, NVIDIA, Visa and others. FMCG and beverage companies such as Johnson & Johnson, Coca Cola and PepsiCo Inc. were also picked. Meta, Microsoft and Intel were the best performing stocks with a  maximum increase of 30%, 20% and 18% respectively.

Not Conclusive

However, the experiment alone cannot be conclusive to prove the chatbot’s ability to predict stocks. The experiment was anecdotal, and the time period of two months is too short to conclude anything definitively. In addition, comparing it with actively managed funds may not necessarily be a proper benchmark. In fact, over a 20-year period, 95% of large-cap actively managed funds have underperformed their benchmark. With ChatGPT being trained on data up to September 2021, the performance of company stocks for the last two years is not tested, which is probably another setback.

Future of AI in Investment Prediction

Jon Ostler, CEO of Finder, is apprehensive of the idea of using ChatGPT for investing research. He believes that researching through known primary sources or a qualified advisor would be a recommended method rather than using a “rudimentary AI platform” that has claimed its data to be ‘patchy’ since September 2021 and does not have the knowledge of market psychology. As per a survey conducted in 2021, investors use social media for investing advice. When compared to an unqualified TikTok star, he believes that AI would be the better choice, however, one should ideally not use any of it.

Editor Notes:

While ChatGPT is being heavily implemented across different work domains and has shown promising results as a fund manager, it is essential to note that experiments are anecdotal, and the period of analysis is too short to draw definitive conclusions. ChatGPT’s ability to predict stocks cannot be considered reliable at this stage. To make informed decisions around investment, it is essential to rely on primary sources or qualified financial advisors rather than ChatGPT.

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