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Exploring Open AI: Its impact on investment knowledge and education

Exploring Open AI: Its impact on investment knowledge and education
28-07-23 / Sisanda Ndlovu

Cape Town - CNN recently reported that a basket of shares chosen by ChatGPT outperformed ten of the UK's top investment funds. While this may seem like open AI has all the answers, Nico Katzke, Head of Portfolio Solutions at Satrix, warns that it shouldn't be seen as a silver bullet for portfolio performance. He cautions that the relevance of AI's replies relies on asking the right questions – and many people don't know what to ask. He strongly suggests using the tool for education only, not financial advice.

He says, "At its core, artificial intelligence is just an incredibly efficient collation of information. If you ask it to guide your investment decisions, it'll give you convincing responses that feel so intuitively human, we trust them more than we should. The problem is you need to know what questions to ask and how to interrogate the answers. That's where a human financial adviser can play a pivotal role. We should also stick to timeless truisms such as the importance of diversification and taking cognisance of costs.

"Where it does hold major potential is as an educational tool. It can give you everything you need to know about a company in five seconds flat. It's great for portfolio research, learning about investment vehicles, understanding balance sheets, knowing more about the markets, and so on."

Understanding Open AI

Katzke says open AI algorithms are a democratising force that help to break down information barriers to entry for various fields of expertise. "AI puts together sentences and answers that are remarkably accurate, relevant and human-like. We shouldn't rely on it to give us new information; rather, it helps us get to our answers faster.

"My main concern is that we put too much trust in its human-like answers, when its output could require more nuance. For example, if we asked it to tell us the five best shares on the JSE, it wouldn't be able to contextualise the question by considering our timeframe, risk appetite, liquidity conditions, alternatives, and other key factors. That's where a human adviser is critical. I see human advisers collaborating with AI to quickly source relevant information for clients. AI will make experts even better at what they do.

"AI also cannot empathise. Think of a new parent with a sick child. 'Googling' the child's symptoms may make the parent even more stressed. They still need a doctor to make sense of the information and reassure them. An adviser plays a similar role."

How AI can benefit investors

Can AI tell you which shares to invest in to maximise your returns? No. 

Katzke adds that when the rules are fixed, machines are great. When the rules are malleable, humans are better. That's why AI is great at chess but average at poker. Open AI is a brute force application. It doesn't excel in an endogenous-problem environment, like a financial market, where every action has a bearing on how all other actions play out.

Can AI make you a better investor? Absolutely.

It is a powerful tool to improve knowledge and market understanding. This knowledge and education could potentially significantly improve your investment outcomes.

Katzke says it's also conceivable that AI could evaluate a person's entire portfolio to suggest ways to diversify this across different sources of risk. Right now, however, he mostly sees AI as a tool for investors to enhance their knowledge and for human advisers to efficiently service their clients.

AI could also make more people feel confident pursuing indexation. AI will soon mean that market prices almost instantly reflect all the information available to investors. This democratised information maximises price efficiency, which should lower cost barriers and drive more people to choose indexation as active managers face increasing pricing pressure.

Katzke concludes, "There has been a lot of hype. We need to treat open AI for what it is – a great way to source information quickly. Don't be fooled into thinking it's human. It's not a genie that can predict top sources of return. However, it will help to further democratise investing by making information more accessible. That's why Satrix is excited about it."

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