ChatGPT's Role in Your Investment Portfolio: Trust or Risk?
69% of investors between the ages of 35 and 44 say they would trust tools like ChatGPT to choose investments or execute trades.
However, mature investors are more skeptical, with 35% of over-55s saying they would use the new technologies. A deeper dive into these findings also show only 31% of female investors say they’re currently using or are open to using them.
Can and should you let tools ChatGPT help you make investment decisions?
Generative artificial intelligence (AI) has taken the world by storm, impacting a host of industries and society through its ability to output brand-new content based on patterns and data it has learned. If you haven’t met ChatGPT yet, it’s essentially a chatbot that uses natural language processing to create humanlike conversational dialogue and compose various written content, including articles, social media posts, essays, code, emails, and more… Such as the potential of integrating AI into investment decisions.
Let’s explore the rise of AI in the investment world, the advantages and pitfalls of relying on AI for financial insights, and guidelines to responsibly use tools like ChatGPT to help your strategy and portfolio.
The Rise of AI in Investment Decisions
The integration of AI into investment decisions is not a novel concept. In recent years, AI has been making its presence felt in the financial industry, from robo-advisors that automate the process of investing to algorithmic trading systems that execute high-frequency trades. These technologies are based on complex algorithms and data analysis—revolutionizing the efficiency, effectiveness, and speed of the work humans can do.
As technology has advanced and more data has become available, these tools have gained popularity. Consider the rise of OpenAI's ChatGPT.
ChatGPT is an example of a large language model (LLM), a computer algorithm trained on vast amounts of data and processes natural language inputs and predicts what words should come next. Whether writing code, planning your kid’s birthday party, sprucing up your resume, or anything in between, ChatGPT can help.
Today, it’s being better leveraged for financial decisions because the potential gains are too significant to pass up.
However, the introduction of AI into the investment world is not without its challenges, and there are valid concerns about the reliability and risks associated with these technologies.
Advantages of AI in Investment
Data-Driven Decision Making
AI systems, like ChatGPT, have the ability to analyze expansive amounts of data quickly and make data-driven investment decisions. They can process news, financial reports, market trends, and historical data in ways that humans simply cannot match in terms of speed and accuracy.
According to McKinsey, generative AI’s impact on productivity could add $2.6 trillion to $4.4 trillion annually to the global economy by 2040.
Takes the Emotions Out of Investing
Emotions can lead to impulsive and irrational investment decisions. AI, on the other hand, remains unaffected by emotional biases, making it a reliable, effective, and stable choice for investors seeking a rational and level approach to managing their portfolios.
With AI investing, decisions are based on market conditions, predictive analyses, and the criteria set from the beginning to identify your goals.
Accessibility
Previously reserved for more sophisticated firms, AI-driven investment tools have become more accessible to a wide range of investors. They can offer low-cost solutions and personalized advice, democratizing access to advanced investment strategies.
Beyond access to the tools themselves, there’s also the accessibility and convenience of accurate information. Computers have an unparalleled advantage over the human brain: they are millions of times faster, have essentially unfailing memory, laser-focused attention, and limitless capability for analyzing substantial volumes of data in mere split milliseconds.
Pitfalls and Risks of Relying on AI
Lack of Human Judgment
While AI’s lack of emotions is an advantage in preventing poor emotional judgment, it doubles as a risk. AI systems operate based on algorithms and historical data; they do not possess the ability to adapt to unforeseen circumstances, market dynamics, or exercise human judgment.
Market events that have not occurred before may pose challenges for AI algorithms.
Overreliance on Technology
Overreliance on AI can lead to complacency among investors. Trusting AI blindly without understanding its underlying principles can be risky, as technology is not entirely flawless.
While, yes, human error is removed from the equation, AI is a machine at the end of the day. With their programmed capabilities, they can’t pivot, be more flexible with their operations, or think outside the box and creatively problem solve (... yet).
Data Biases
There have been records of AI algorithms that have reinforced existing biases by systems trained on biased, old, or limited data sets. This can result in skewed investment advice and outcomes.
As said in this McKinsey report: “Such flawed recommendations could result in a significant amount of harm and damage, including consumer losses, backlash, and regulatory fines.”
Using ChatGPT and Similar Tools Wisely
To strike a balance between trust and risk when incorporating ChatGPT and similar tools into your investment strategy, consider the following guidelines:
Educate Yourself
Before relying on AI tools, take the time to understand how they work and the principles behind their recommendations. Knowledge is your best defense against overreliance.
Diversify Your Information Sources
Don't rely solely on AI-generated insights. It’s paramount to strike a healthy balance between AI recommendations with human judgment and insights from multiple sources to make well-informed decisions.
Monitor and Adjust
Keep a close eye on the investment guidance you’re receiving (think: market research, predictive analytics, risk assessment, sentiment analysis, forecasting, etc), and be prepared to adjust your conclusions as needed. AI is a tool, not a one-stop-shop solution.
Stay Informed
Keep a pulse on AI advancements and continue to educate yourself about their impact on the financial industry. Being aware of the latest developments will help you make better-informed decisions.
The financial technology landscape is evolving rapidly, and AI is at its forefront. If you’re not taking advantage of it, you’ll struggle to stay ahead of the curve and risk falling behind AI-driven competition.
But incorporating ChatGPT into your investment strategy doesn't have to be an all-or-nothing decision—in fact, it shouldn’t be.
The key to unlocking its full potential is finding the balance between trust and risk by using AI tools wisely, staying informed, and remaining engaged in your investment decisions. Opt for a hybrid approach and combine AI-driven tools with human expertise, allowing you to benefit from its strengths while mitigating the risks associated with either approach alone.
Investors and The51 community—we'd love to learn how you're using generative AI tools in your investment portfolio. Let us hear your thoughts.
*Please note that the information provided in this blog post is for informational purposes only and should not be construed as investment or financial advice. It's important to conduct due diligence, seek professional advice, and evaluate the suitability of investment opportunities based on your individual circumstances and risk tolerance.