Trading with ChatGPT
In this paper, we use ChatGPT outages to provide early evidence on whether investors rely on generative artificial intelligence (GenAI) to perform professional tasks and the associated impact on stock price informativeness. We document a significant decline in stock trading volume during ChatGPT outages. The effect is stronger for firms with corporate news released immediately before or during the outages and for firms with higher ownership held by transient institutional investors. We then document declines in short-run price impact and return variance during the outage periods, consistent with reduced informed trading. Lastly, we document a positive effect of GenAI-assisted trading on long-run stock price informativeness. Overall, our findings indicate that a significant number of investors use ChatGPT in ways that influence their trading decisions and market outcomes. Future research can investigate the mechanisms underlying these GenAI effects and the potential risks of using GenAI for trading.
That is from a new paper by Qiang Cheng, Pengkai Lin, and Yue Zhao. Via the excellent Kevin Lewis.
My excellent Conversation with Nate Silver
Here is the audio, video, and transcript. Here is part of the episode summary:
Tyler and Nate dive into expected utility theory and random Nash equilibria in poker, whether Silver’s tell-reading abilities transfer to real-world situations like NBA games, why academic writing has disappointed him, his move from atheism to agnosticism, the meta-rationality of risk-taking, electoral systems and their flaws, 2028 presidential candidates, why he thinks superforecasters will continue to outperform AI for the next decade, why more athletes haven’t come out as gay, redesigning the NBA, what mentors he needs now, the cultural and psychological peculiarities of Bay area intellectual communities, why Canada can’t win a Stanley Cup, the politics of immigration in Europe and America, what he’ll work on next, and more.
Excerpt:
COWEN: If you think about the Manifold types in terms of the framework in your book, how they think about risk — is there a common feature that they’re more risk-averse, or that they worry more? Is there a common feature that they like the idea that they hold some kind of secret knowledge that other people do not have? How do you classify them? They’re just high in openness, or what is it?
SILVER: They’re high in openness to experience. I think they’re very high in conscientiousness.
COWEN: Are they? I don’t know.
SILVER: Some of them are. Some of them are, yes.
COWEN: I think of them as high variance in conscientiousness, rather than high in it.
[laughter]
SILVER: The EAs and the rationalists are more high variance, I think. There can be a certain type of gullibility is one problem. I think, obviously, EA took a lot of hits for Sam Bankman-Fried, but if anything, they probably should have taken more reputational damage. That was really bad, and there were a lot of signs of it, including his interviews with you and other people like that. It contrasts with poker players who have similar phenotypes but are much more suspicious and much more street smart.
Also, the Bay Area is weird. I feel like the West Coast is diverging more from the rest of the country.
COWEN: I agree.
SILVER: It’s like a long way away. Just the mannerisms are different. You go to a small thing. You go to a house party in the Bay Area. There may not be very much wine, for example. In New York, if the host isn’t drinking, then it’d be considered sacrilege not to have plenty of booze at a party. Little things like that, little cultural norms. You go to Seattle — it feels like Canada to me almost, and so these things are diverging more.
COWEN: Why is belief in doom correlated with practice of polyamory? And I think it is.
SILVER: If you ask Aella, I guess, she might say, if we’re all going to die or go to whatever singularity there is, we might as well have fun in the meantime. There’s some of that kind of hedonism. Although in general, it’s not a super hedonistic movement.
COWEN: It seems too economistic to me. Even I, the economist — I don’t feel people think that economistically. There’s more likely some psychological predisposition toward both views.
SILVER: I guess you could argue that society would be better organized in a more polyamorous relationship. People do it implicitly in a lot of ways anyway, including in the LGBTQ [laughs] community, which has different attitudes toward it potentially. and if there’s not as much childbearing, that can have an effect, potentially. I think it’s like they are not being constrained by their own society thing that is taken very seriously in that group. There’s enough disconnectedness and aloofness where they’re able to play it out in practice more.
That creeps a little bit into Silicon Valley too, which can be much more whimsical and fanciful than the Wall Street types I know, for example.
Recommended. Here is my 2024 episode with Nate, here is my 2016 episode with him.
Wednesday assorted links
My talent podcast with Yonatan Ben Shimon
Free the Patient: A Competitive-Federalism Fix for Telemedicine
During the pandemic, many restrictions on telemedicine were lifted, making it far easier for physicians to treat patients across state lines. That window has largely closed. Today, unless a doctor is separately licensed in a patient’s state—or the states have a formal agreement—remote care is often illegal. So if you live in Virginia and want a second opinion from a Mayo Clinic physician in Florida, you may have to fly to Florida, unless that Florida physician happens to hold a Virginia license.
The standard framing says this is a problem of physician licensing. That leads directly to calls for interstate compacts or federalizing medical licensure. Mutual recognition is good. Driver’s licenses are issued by states but are valid in every state. No one complains that Florida’s regime endangers Virginians. But mutual recognition or federal licensing is not the only solution nor the only way to think about this issue.
The real issue isn’t who licenses doctors. It’s that patients are forbidden from choosing a licensed doctor in another state. We can keep state-level licensing, but free the patient. Let any American consult any physician licensed in any state. That’s competitive federalism—no compacts, no federal agency, just patient choice.
A close parallel comes from credit markets. After Marquette Nat. Bank v. First of Omaha (1978), host states could no longer block their residents from using credit cards issued by national banks chartered elsewhere. A Virginian can legally borrow on a South Dakota credit card at South Dakota’s rates. Nothing changed about South Dakota’s licensing; what changed was the prohibition on choice.
Consider Justice Brennan’s argument in this case:
“Minnesota residents were always free to visit Nebraska and receive loans in that state.” It hadn’t been suggested that Minnesota’s laws would apply in that instance, he added. Therefore, they shouldn’t be applied just because “the convenience of modern mail” allowed Minnesotans to get credit without having to visit Nebraska.
Exactly analogously, everyone agrees that Virginia residents are free to visit Florida and be treated by Florida physicians. No one suggests that Virginia’s laws should follow VA residents to Florida. Therefore, VA’s laws shouldn’t be applied just because the convenience of modern online tools allow Virginians to get medical advice and consultation without having to visit Florida.
In short, patients should be allowed to choose physicians as easily as borrowers choose banks.
David Beckworth on stablecoins and stability
A key reason for the global financial cycle, as outlined by Hélène Rey, is that many firms and financial institutions in developing countries borrow heavily in U.S. dollars while their revenues, assets, and cash flows are denominated in local currency. When the Fed tightens policy, the dollar appreciates, global financial conditions tighten, and these firms suddenly find themselves squeezed by rising dollar debt burdens and falling asset values. This balance sheet shock forces cutbacks and retrenchment. This is one of the key channels through which U.S. monetary policy spills over globally.
But what Rashad Ahmed noted in our dicussion is that if households and firms begin holding dollar assets via stablecoins—in addition to borrowing in dollars—they begin to build a natural hedge on their balance sheets. A stronger dollar no longer only increases liabilities; it also raises the value of their dollar assets, helping to offset the shock. In effect, stablecoins can act as a decentralized balance sheet stabilizer, muting one of the very mechanisms that drives global financial volatility.
Here is the full post, featuring also a podcast on the topic.
*Saving Can-Do*
The author is Philip K. Howard and the subtitle is How to Revive the Spirit of America. The book is short, to the point, in the “abundance + state capacity” genre. Excerpt, noting I will not double indent:
“Three major changes are needed to restore the authority to achieve results: a new legal framework, a new institution that can inspire trust in ongoing decisions, and a special commission to design the details of these changes.
New legal framework defining official authority.
Here’s a sketch of what a new infrastructure decision-making framework might look like:
- Separate agencies should be designated as decision-makers for each category of infrastructure. The head of that agency should have authority to approve permits. For federal approvals, all decisions should be subject to White House oversight. For projects with national or reigonal significance, federal decisions should preempty state and local approvals.
- Fifty years of accumulated mandates from multiple agencies should be restated as public goals that can be balanced against other public goals….a recodification commission is needed to reframe thousands of pages of detailed regulatory prescriptions into codes that are goal-oriented and honor public tradeoffs. But unti this canhappen, Congress should authoritze the executive brranch to approve permits “notwithstanding provisions of law to the contrary” — provided the executive branch identifies the relevanto provisions and provides a short statement of why the approvals are in the public interest.
- Processes should be mainly tools for transparency and should be understood by courts as general principles reviewed for abuse of discretion, not as rules requiring strict compliance. NEPA has been effectively rewritten by judicial fitat, so it should be amended to return to its original goals — to provide enviromental transparency, public comment, and a political judgment.
- The jurisdiction of courts must be sharply limited. Lawsuits should be allowed foro approvals that transgress boundaries of executive responsbility, not inadequate review of process, unless these are so deficient as to be arbitrary.
Changing law is always politicall difficult, but the second challenge is perhaps even harder: creating new institutions that can inspire trust.”
TC again: All worth a ponder.
Are consumers hostile to high-falutin’ claims?
We find that decreases in Michelin stars improve consumer review ratings…The analysis of review content further shows that a loss in Michelin stars leads consumers to become less focused on value and become less demanding regarding service.
Here is the paper. Has implications for online life, GPT-5 reviews, and much more. Via the excellent Kevin Lewis.
Tuesday assorted links
1. Bells ringing before Vespers.
3. At least thirty-three crypto kidnappings this year?
4. University presidents arguing with each other.
5. Some reasons why DC has been getting worse, of course add Work from Home (which generally I favor, but bad for DC) to that list. And violence in DC is quite high. Note I favor DC absorption by Maryland, not rule by the feds. At least most of DC should be absorbed, you might keep a narrow sliver, the part with the major government buildings, as an autonomous sliver. There is no reason why Chevy Chase has to belong too an autonomous district rather than to Maryland.
My podcast with Mitch Daniels
Done with Liberty Fund, I very much enjoyed chatting with him. Here is the link. Here is their episode summary:
Tyler Cowen joins Mitch Daniels to explore AI’s promise, economic threats from debt and regulation, and the need for bold, intelligent policy to secure economic growth, innovation, and individual liberty. Cowen discusses his views on immigration, COVID lockdowns and addresses societal fear of confronting rapid technological change.
A very down to earth conversation, in the best sense of that term.
Why did air conditioning spread so fast in Mexico?
A common theme in the vast literature on climate change is the estimation of models using historical data to make predictions many decades into the future. Although there is a large and growing number of these types of studies, researchers rarely return later to check the accuracy of their predictions. In this paper, we perform such an exercise. In Davis and Gertler (2015), we used household-level microdata from Mexico to predict future air conditioning adoption as a function of income and temperature. Revisiting these predictions with 12 years of additional data, we find that air conditioning in Mexico has accelerated, significantly exceeding our predictions. Neither errors in predicting income growth or rising temperatures, nor migration patterns, nor an overly restrictive model can explain the large prediction gap. Instead, our results point to the failure to account for falling electricity prices and technological changes in air conditioner efficiency as key drivers of the prediction gap.
That is from a new NBER working paper by Lucas W. Davis and Paul Gertler. As of 2022, the rate of air conditioning access in Mexico was about 18.5%, only slightly less than that of Europe.
Emergent Ventures winners, 45th cohort
Anya Singh, Hawthorne, CA/YC, to help protect IP.
Patrick Murphy, Limerick, travel grant.
Daryna Hrybchuk, 18, Lviv, general career support.
Ari Shtein, Ann Arbor, Michigan/Yale, 17, general career support.
Vadzim Rayinchick, Belarus/SF, “Confessions”.
Garret Thomas Molloy, Dublin/Stanford, travel and study grant.
Jon Cooper, UK and Stanford, AI and historical archives.
Jerusalem Demsas, general career support for new projects.
Manuel Martin Morante, Extremadura, to visit MIT, eventual biotech start-up.
Jal Patel, 16, Regina, Canada, general career support for AI and biotech.
Ayana Farooq, Mississauga, brain neurons.
Adria Moret, Barcelona, AI and philosophy, so LLMs understand animal welfare better.
Monday assorted links
1. Ghana + assisted suicide + a bunch of other things (NYT).
2. Spain and immigration (NYT).
3. Mark Zuckerberg thinking like an economist.
4. Gideon Rachman on Ukraine deals (FT).
5. Zvi on GPT-5.
6. Buy someone else’s vacation at a discount. Full WSJ article here.
Are Juries Racially Discriminatory?
We implement five different tests of whether grand juries, which are drawn from a representative cross-section of the public, discriminate against Black defendants when deciding to prosecute felony cases. Three tests exploit that while jurors do not directly observe defendant race, jurors do observe the “Blackness” of defendants’ names. All three tests—an audit-study-style test, a traditional outcome-based test, and a test that estimates racial bias using blinded/unblinded comparisons after purging omitted variable bias—indicate juries do not discriminate based on race. Two additional tests indicate racial bias explains at most 0.3 percent of the Black-White felony conviction gap.
That is from a new NBER working paper by
The Rising Returns to R&D: Ideas Are not Getting Harder to Find (one hypothesis)
R&D investment has grown robustly, yet aggregate productivity growth has stagnated. Is this because “ideas are getting harder to find”? This paper uses micro-data from the US Census Bureau to explore the relationship between R&D and productivity in the manufacturing sector from 1976 to 2018. We find that both the elasticity of output (TFP) with respect to R&D and the marginal returns to R&D have risen sharply. Exploring factors affecting returns, we conclude that R&D obsolescence rates must have risen. Using a novel estimation approach, we find consistent evidence of sharply rising technological rivalry and obsolescence. These findings suggest that R&D has become more effective at finding productivity-enhancing ideas, but these ideas may also render rivals’ technologies obsolete, making innovations more transient. Because of obsolescence, rising R&D does not necessarily mean rising aggregate productivity growth.
Here is the paper by Yoshiki Ando (Singapore Management University, TPRI), James Bessen (BU, TPRI), and Xiupeng Wang. Via Arjun.