The author is the founder and executive chairman of Dimensional Fund Advisors. The University of Chicago Booth School of Business is named after him.
Can artificial intelligence help with stock picking? More specifically, could investors use artificial intelligence to determine a fair price for a stock or bond? I bet many people would say yes by now, as recent advances allow for the processing of more and more information.
I think my AI is better than all other AIs. My AI is the market.
For example, choose a stock. Check prices. Why that exact price? Because when selling or buying at the same time, the same number of buyers and sellers think they’re getting a good deal. They make these judgments using every piece of information they can get their hands on, public and private. The market is the world’s largest information-processing machine, creating the price of every publicly traded stock and bond.
These prices are set in an environment where no one knows what to expect. So in that sense it’s a giant model, the best and evolving human guess of how each company’s stock or bond will perform.
Despite all the promises of AI, I’d much rather accept the market price than the algorithmic one. Large language models, the type of AI that powers tools like ChatGPT, are designed to understand and generate text that looks like it was produced by a human, rather than predicting future outcomes.
They can generate latent scenarios based on learned patterns, but they struggle to account for unknowns or real-world variations outside of the training data. In this way, they are truly “artificial”, whereas the market is made up of real human intelligence and the millions of judgments made by market participants.
Of course, artificial intelligence and algorithmic trading can help execute trades. But there’s no reason to think that AI will fundamentally affect how people think about stock prices anytime soon.
The market is extremely complex. So much so that no one knows exactly how much one particular piece of information affects price because there are so many other simultaneous inputs. But the market ensures that the price is the most accurate current representation of a stock or bond’s value. It’s free and available to everyone. How awesome is that?
This is not just my opinion. There is plenty of evidence to support it. In fact, it’s a 50-year-old theory, and it’s only going to get more confirmation as time goes on. Google “efficient market hypothesis”. Better yet, ask ChatGPT to explain.
Still don’t believe me? So I ask another question: Do you think you can hire a manager to implement a strategy that uses artificial intelligence to pick stocks that consistently outperform? After fees, probably not. If they have some cool AI that actually does predict stock prices better than the market, why would they share that information with you?
What’s the point? You can have a great experience without worrying about all of these things. Based on nearly a century of data, the stock market has returned about 10% a year, beating inflation by 7%. This was true before and after computers, before and after the Internet, and even before and after World War II. It makes sense to me that this will continue after AI. Because our AI is “aggregated intelligence,” which includes artificial intelligence and improves on it.
To be clear, I celebrate the innovation this moment may represent. As I’ve witnessed time and time again in my career over the past 50 years, many players will try to take advantage of the latest technological advances to improve their companies and build new ones. By buying the market, you can own a piece of all listed companies.
If I still can’t convince you, I asked ChatGPT, “Is it safer to trust the market price mechanism than to rely on AI models to spot mispricing of stocks and bonds?”
Here’s the response I got the day I asked: “It is usually safer to trust the market price mechanism than to rely on artificial intelligence models to spot mispricing of stocks and bonds. The market price mechanism is based on the collective actions of all market participants and incorporates all available information Asset prices. Therefore, it will be difficult for any single investor or AI model to consistently outperform the market by identifying mispricing.”
So if you don’t believe me, Trust AI tells you not to trust AI in the market.