Can ChatGPT Predict How Stocks Perform? Research Says Yes ...
Artificial intelligence (AI) has transformed various industries, and it seems like the finance sector is next. The finance professors at the University of Florida, Alejandro Lopez-Lira and Yuehua Tang, have conducted research on ChatGPT, the AI chatbot, to determine if it can predict stock price movements, and the findings are astonishing.
Within a few months, ChatGPT has become popular. Tech giants like Microsoft and Google have joined the chatbot search wars, and investors are quickly seeking ways to invest in AI. The Florida researchers found that ChatGPT can often predict stock price movements by using news headlines as an indicator of whether a stock may go up or down.
How Did the Experiment Work?
The professors asked ChatGPT to predict if around 40,000 headlines published between October 2021 and December 2022 were positive or negative for stocks listed on the New York Stock Exchange, NASDAQ, and American Stock Exchange. They asked ChatGPT to forget all previous instructions and pretend to be a financial expert with stock recommendation experience to provide a "YES" if the news was good, "NO" if it was bad, or "UNKNOWN" if uncertain in the first line. Then elaborate with one short and concise sentence on the next line.
The researchers analyzed the subsequent performance of those stocks and found that the chatbot had statistically significant predictive power on daily stock market returns, and it outperformed traditional sentiment analysis methods. The researchers predict that investing firms that were not already using this technology will start now, and the markets will become more efficient because of it. It will mean stock prices will better reflect all the most up-to-date information, making it harder for investors to beat the market.
Investing in AI as ChatGPT Takes Tech by Storm
It is worth noting that typically institutional investors are the ones who have the infrastructure to trade on news like this. Retail investors may not have the tools to trade on the headlines, and it is not advisable to compete with big institutional investors. However, a more efficient market is a good thing for all investors. It means that prices become more favorable, which is an excellent outcome for retail investors.
It is not just investing that ChatGPT entering the conversation could affect; it could also impact regulation. Investors rely more and more on news and headlines, and some regulators may need to step in to ensure that the information is accurate and not misleading. In conclusion, ChatGPT is a powerful tool that investors can use to predict stock price movements, but it's essential to be mindful of the risks and potential limitations.
