June 1, 2023 – ChatGPT, the artificial intelligence (AI) platform from OpenAI heavily funded in partnership with Microsoft, was unleashed on the technology scene late last year and reignited the debate about the future of AI. This includes, of course, its impact on society, business, and politics. There are pros and cons, and it’s still very early to assign a high probability to the broad impact. More specifically with regards to the way we invest, we don’t view it as a particular threat or game-changer. Rather, it could result in markets incorporating information into prices more efficiently, which would be a positive for our investment approach.
Supporters see the arrival of OpenAI as a major breakthrough, while skeptics have dismissed it as pure hype. Disruptive technologies often produce conflicting opinions: you may recall similar dissent during the crypto craze, when new technology brought predictions of blockchain transforming industries and disintermediating society. While adoption of technology and the speed at which it happens has increased, truly transformational innovations often take decades to fully materialize.
Seen in a positive light, AI has the potential to alter how we find information, generate content, create new products, and respond in real-time to emerging events. (Are you 100% certain Chat GPT didn’t craft this email?)
A glass-half-empty view, though, might be wary of harmful content, disinformation, political favoritism, racial bias, a lack of transparency, workforce impact, and intellectual property theft.
Representing the naysayers, philosopher and intellectual Noam Chomsky has been a critic, labeling ChatGPT “high-tech plagiarism” and arguing that AI will never be capable of replicating what the human brain can do.1
On the other hand, many take the other side and are bullish on AI, likening its release into the world akin to our discovery of fire or the wheel.
Elon Musk, who co-founded the firm behind ChatGPT, sees both sides, warning that AI is “one of the biggest risks” to civilization, albeit one that has great promise and capability.2 Others have seen the potential of ChatGPT as pivotal to the future of many different domains and capable of automating and replacing several job categories. Goldman Sachs Investment Research recently released the following chart, arguing that yes, AI may take jobs, but it will also create new ones.
A recent article from Money.com referenced a research paper from the University of Florida positing that ChatGPT can help predict stock price movements in the short term by quickly incorporating publicly available news. The paper argued that ChatGPT will make markets more efficient and harder to beat; the time taken to incorporate new information could decrease from a day to an hour or even a minute.
This is, potentially, a net positive for our investment approach, which uses information in market pricing to make positioning decisions. For traditional active managers, this is bad news, as a more efficient market means fewer inefficiencies to exploit.
AI and algorithmic trading can help the execution of trades and may lower transaction costs even further over time. Some asset managers have been incorporating machine learning into their process for decades. We don’t believe AI will fundamentally influence the way people assess securities values and/or expected returns anytime soon.
Capital markets are comprised of vast participants with varying goals, time horizons, and beliefs. There are so many factors at work, it’s nearly impossible to say how an asset’s pricing will react to news with any certainty.
Sometimes, good news is truly good news: company X beat earnings estimates and gave strong forward guidance for sales and profits in the future, leading to an increase in stock price.
Sometimes, good news is bad news: the labor market is strong and resilient (yay!) which means the Fed will keep raising rates to slow growth (boo!); the market may retreat on the “good” news. The initial reaction may be correct, and a high frequency trader may be able to profit from those instantaneous moves, but a trading strategy is much different than a long-term investment strategy.
Overall, we are intrigued by the potential to increase efficiency and output through leveraging this technology in our professional and personal lives. We also believe regulation is important. These powerful tools can enable bad actors to be even more convincing in fraud attempts. Being aware of what information we share and how, and remaining skeptical of urgent or unsolicited requests, are key to safeguarding ourselves in this evolving digital landscape.
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Notes:
1. https://www.openculture.com/2023/02/noam-chomsky-on-chatgpt.html
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