If you were to poll strangers on what comes to mind when they hear the term AI (artificial intelligence), I suspect the two most likely answers would be Skynet or ChatGPT.
The generative chat program launched in 2022 seems to have drawn the most mainstream attention to AI applications since Arnold Schwarzenegger promised he’d be back.
But the history of AI tools is far older than ChatGPT, although less dramatic than its depiction in 1990s science fiction films.
And from an investment standpoint, artificial intelligence pales in comparison to the informational content of the market’s AI — aggregate intelligence.
AI Has Been among Us for Years
ChatGPT is but a recent example of AI. One watershed moment came in 1997 when the machine named Deep Blue became the first computer to secure victory in a match against a chess grandmaster.
In the mid-2000s, IBM researchers created the Watson computer to compete with star Jeopardy! contestants, ultimately defeating two of the show’s most decorated past champions.
And how many of us routinely dispense orders to, and receive suggestions from, Siri or Alexa?
The common thread among these examples is that each represents a tool that processes and organises data to identify patterns and summarise information or make suggestions.
This type of interaction with AI has grown to permeate our everyday lives.
Have you noticed your phone offer an unsolicited ETA for your commute when you get in your car?
Does your text app suggest grammar revisions based on the context of your overall message?
Congrats — you’re an AI user, even if you’ve never opened a ChatGPT session.
AI May Not Help Pick Stocks…
AI has a similarly long history with investing. Active investors have attempted to get an informational edge on markets by using AI processes to retrieve and process data. For example, tools that gauge sentiment from social media or scrape text from company financial reports predate ChatGPT by many years.
While these efforts may have been aimed at selecting stocks that would outperform markets, it’s not clear AI tools are a recipe for consistently generating abnormal returns.
Material information gleaned from running AI processes is very likely a subset of the vast information set known by the market in aggregate and reflected in market prices.
If new information is obtained, the process of acting on that information (buying or selling stocks/bonds) incorporates it into market prices. As more investors employ these tools, any edge from doing so should wane.
Another reason to question AI’s role in helping market timing is limitations with its predictions.
AI’s forecasting ability fares well when assessing patterns that are relatively stable. For example, my phone’s navigation app is often successful at “guessing” when I’m commuting to work because I come to the office on the same days each week.
Autonomous car navigation programs know to slow down at the sight of a stop sign because these visual cues are universal and evergreen.
AI is far less likely to successfully predict changes within complex systems that are as dynamic as stock and bond markets.
AI trying to predict market prices is like self-piloting cars trying to read stop signs with words, shapes, and colours that differ from one day to the next. The continuous emergence of new information material to market prices is antithetical to static patterns fostering predictability.
…But It May Enhance a Fund Manager’s Process
AI can make businesses more efficient if used as a tool for what Professor Robert C. Merton describes as “assisted implementation” — interrogating data, servicing clients, or making processes more efficient.
But like any tool, you have to know how to use it. For example, if it makes interrogating data much easier, then the chances of finding results from data dredging increase.
Where using AI can be very helpful is for firms with massive data sets on their customers’ activities. It can help those firms identify what their customers are more likely to buy next and advertise in a smart way.
Over time, the best chess players realised chess computers were a powerful supplement to strategy and pattern recognition.
Similarly, the best path forward for investment management is likely an amalgam of humans and technology such as AI.
The investment approach discussed does not assure a positive return or a positive investment experience. There are numerous ways of approaching investing, only one of which is presented here, which may not be appropriate for every individual.
The information in this material is intended for the recipient’s background information and use only. It is provided in good faith and without any warranty or representation as to accuracy or completeness. Information and opinions presented in this material have been obtained or derived from sources believed by Dimensional to be reliable, and Dimensional has reasonable grounds to believe that all factual information herein is true as at the date of this material. It does not constitute investment advice, a recommendation, or an offer of any services or products for sale and is not intended to provide a sufficient basis on which to make an investment decision. Before acting on any information in this document, you should consider whether it is appropriate for your particular circumstances and, if appropriate, seek professional advice. It is the responsibility of any persons wishing to make a purchase to inform themselves of and observe all applicable laws and regulations. Unauthorized reproduction or transmission of this material is strictly prohibited. Dimensional accepts no responsibility for loss arising from the use of the information contained herein.
This material is not directed at any person in any jurisdiction where the availability of this material is prohibited or would subject Dimensional or its products or services to any registration, licensing, or other such legal requirements within the jurisdiction.
Robert Merton provides consulting services to Dimensional Fund Advisors LP.
“Dimensional” refers to the Dimensional separate but affiliated entities generally, rather than to one particular entity. These entities are Dimensional Fund Advisors LP, Dimensional Fund Advisors Ltd., Dimensional Ireland Limited, DFA Australia Limited, Dimensional Fund Advisors Canada ULC, Dimensional Fund Advisors Pte. Ltd., Dimensional Japan Ltd. and Dimensional Hong Kong Limited. Dimensional Hong Kong Limited is licensed by the Securities and Futures Commission to conduct Type 1 (dealing in securities) regulated activities only and does not provide asset management services.
Investments involve risks. The investment return and principal value of an investment may fluctuate so that an investor’s shares, when redeemed, may be worth more or less than their original value. Past performance is not a guarantee of future results. There is no guarantee strategies will be successful.
This material is issued by DFA Australia Limited (AFS License No. 238093, ABN 46 065 937 671). This material is provided for information only. No account has been taken of the objectives, financial situation or needs of any particular person. Accordingly, to the extent this material constitutes general financial product advice, investors should, before acting on the advice, consider the appropriateness of the advice, having regard to the investor’s objectives, financial situation and needs. Investors should also consider the Product Disclosure Statement (PDS) and the target market determination (TMD) that has been made for each financial product either issued or distributed by DFA Australia Limited prior to acquiring or continuing to hold any investment. Go to dimensional.com/funds to access a copy of the PDS or the relevant TMD. Any opinions expressed in this material reflect our judgement at the date of publication and are subject to change.