AI Outperforms Humans in Analysis, Enhances Investor Behavior

AI analysis outperforms humans in financial predictions, but its greatest value is in helping investors maintain long-term discipline.

The next generation of robo-advisers might veer into the world of short-term trading and stock-picking.

A recent study by researchers from the University of Chicago has shown that AI, specifically large language models that have been trained on vast amounts of text and can generate natural-sounding responses, can analyze financial statements as well as, if not better than, human analysts. But before you ask ChatGPT to suggest your next trade, there’s more to the story.

The researchers provided GPT-4 with financial statements – with company names and identifying details removed – and asked it to predict the direction of future earnings. The results showed that GPT-4 outperformed human analysts with more accurate predictions of earnings changes. Moreover, trading strategies based on GPT-4′s predictions yielded higher returns than those based on other models.

So, what does this mean for the future of financial analysis? In the short term, AI’s ability to process vast amounts of data and generate insights quickly and accurately is undeniably going to have an impact on the financial services industry. Ultimately, for investors, AI will strengthen the argument for a passive investing approach.

AI can analyze trends, compute key financial ratios, and provide narrative insights about a company’s future performance faster than humans. Professionals will add AI co-pilots to their tool kits, much as software developers are already.

However, the long-term implications for retail investors are more nuanced. As more firms adopt AI technologies, the initial edge provided by AI will diminish. Just as high-frequency trading firms, who rely on speed for a trading advantage, competed with one another to reduce the time it took for their orders to reach an exchange (one high-frequency trading firm once paid US$14-million for a field next to the Chicago Mercantile Exchange so they could put up antennae to route their orders one microsecond faster), so too will AI-enhanced financial analyses develop into an arms race.

In other words, if an edge exists, the market will devour it until no sustainable advantage remains.[…]

AI analysis outperforms humans in financial predictions, but its greatest value is in helping investors maintain long-term discipline.

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