Can ChatGPT Assist in Picking Stocks? Recent Research Says Yes

Recent research published in the prestigious Finance Research Letters journal has shed light on a promising new tool for investors: AI language models like ChatGPT. Two groundbreaking studies explore how these AI systems can enhance investment decisions and assist in stock selection.

Can ChatGPT Improve Investment Decisions?

Researchers Ko and Lee conducted a pioneering study examining ChatGPT's role in portfolio management, focusing specifically on asset selection and diversification. Their findings were remarkable: ChatGPT's asset selections demonstrated statistically significant improvements in diversity compared to randomly selected assets.

When constructing portfolios based on ChatGPT's selections, these portfolios consistently outperformed those built using randomly selected assets. This suggests that ChatGPT can identify abstract relationships between assets and their dissimilarities across asset classes - a crucial skill for effective diversification.

"Our study contributes to a better understanding of the role of LLMs like ChatGPT as potential assistants for portfolio managers," the researchers concluded. They highlight ChatGPT's capabilities in serving as a valuable co-pilot that offers nuanced market insights and supports complex decision-making.

Can ChatGPT Assist in Picking Stocks?

In a separate study, researchers Pelster and Val conducted a live experiment to evaluate whether ChatGPT could effectively pick stocks. Their findings were equally promising: ChatGPT's earnings forecasts significantly correlated with actual earnings, after controlling for consensus forecasts.

Furthermore, the study found that ChatGPT's "attractiveness ratings" for stocks positively correlated with future stock returns. An investment strategy based on these ratings yielded positive returns, suggesting ChatGPT can successfully identify stocks likely to perform well.

The researchers also observed that ChatGPT updates its ratings in response to news information in a timely manner, showing clear distinctions between positive and negative news events. It particularly adjusted ratings following negative earnings surprises, demonstrating its ability to process and interpret financial news.

Implications for Investors

These studies highlight the potential for AI systems like ChatGPT to democratize access to sophisticated financial analysis. By leveraging natural language processing capabilities, ChatGPT can distill large volumes of information into concise, actionable insights - a task that would be overwhelming for individual investors.

For everyday investors, this means having access to a tool that can potentially:

• Provide more diversified asset selection for building portfolios
• Offer timely evaluations of earnings announcements and news events
• Identify stocks with higher potential for future returns
• Process vast amounts of financial information quickly and effectively

While both studies advise caution and note that AI systems aren't perfect, they nonetheless demonstrate the significant potential of ChatGPT and similar technologies to transform how investment decisions are made.

We run AITrader as an experiment in the same spirit as that research: a defined universe (Nasdaq-100), AI-generated scores, explicit portfolio rules, and performance you can inspect. The question we care about is what happens when you hold that setup to real data, not whether it sounds impressive in a pitch deck.