Can ChatGPT Overcome Behavioral Biases in Gold Investment?

Takeaway:
The "Classify-and-Rethink" (CAR) strategy using ChatGPT outperforms basic prompt designs and buy-and-hold, achieving the highest return and Sharpe ratio by neutralizing framing biases.

Key Idea: What Is This Paper About?

The paper proposes a novel prompt design—Classify-and-Rethink (CAR)—to help ChatGPT overcome behavioral biases like the framing effect in investment decisions. Using gold-related news, CAR helps generate more rational scores that improve trading decisions and boost returns.

Economic Rationale: Why Should This Work?

Behavioral finance shows that investors (and even AI) can be swayed by how information is framed. This leads to irrational decisions and missed opportunities.

Relevant Economic Theories and Justifications:

• Framing Effect: Decisions shift depending on wording, not substance.
• Behavioral Biases: Emotional/cognitive errors affect financial judgment.
• Rational Expectation & Reflexivity: AI can simulate human bias but can also be prompted to overcome it.

Why It Matters:
CAR proves that prompt engineering can guide AI to make more thoughtful, long-term decisions—bridging behavioral finance and LLM-based investing.

How to Do It: Data, Model, and Strategy Implementation

Data Used

• Data Sources:
  • News: dyhjw.com
  • Price: Shanghai Gold Exchange (Au9999) via Wind
• Time Period: Jan 2, 2018 – Jun 13, 2023
• Asset Universe: Spot gold (China)

Model / Methodology

• Type of Model: ChatGPT (GPT-3.5)
• Key Features: Chain-of-Thought (CoT) prompting
• Process:
  1. Classify news into 6 event types
  2. Score sentiment from -1 to 1
  3. Rethink from long-term perspective and adjust score
• Prompt Design: Multi-step zero-shot reasoning

Trading Strategy

• Signal Generation:
  • One-Step: average of last 5 news scores
  • CAR: average of last 20 news scores (with reflection)
• Portfolio Construction:
  • Binary: Fully in or out of gold
• Rebalancing Frequency:
  • Event-triggered (based on score thresholds)

Key Table or Figure from the Paper

Reference: [Table 1]

Explanation:
CAR strategy achieves 80.35% annual return and Sharpe ratio of 1.071, beating other strategies. It also produces a normal distribution of sentiment scores—closer to real market dynamics and more robust for trading.

Final Thought

🧠 Prompt engineering helps ChatGPT become a behavioral-finance-aware investor—enhancing reasoning and returns.

Paper Details (For Further Reading)

• Title: Can ChatGPT Overcome Behavioral Biases in the Financial Sector? Classify-and-Rethink: Multi-Step Zero-Shot Reasoning in the Gold Investment
• Authors: Shuoling Liu, Gaoguo Jia, Yuhang Jiang, Liyuan Chen, Qiang Yang
• Publication Year: 2025
• Journal/Source: arXiv Preprint
• Link: https://arxiv.org/abs/2411.13599

🧠 What is the "Classify-and-Rethink" (CAR) Strategy?

The Classify-and-Rethink (CAR) strategy is a multi-step prompt framework designed to guide ChatGPT (or other LLMs) in making better investment decisions by simulating a more rational, long-term thinking investor. It helps overcome behavioral biases, especially the framing effect.

🔄 Step-by-Step Breakdown with Prompts

1️⃣ Step 1: Classify the News

• Goal: Understand the type of event described in the news.
• Action: ChatGPT categorizes each gold-related news article into one of six types:
  • Geopolitical event
  • Macroeconomic data release
  • Central bank policy and actions
  • Currency exchange rate movements
  • Stock market fluctuations
  • Gold supply and demand
• Prompt Example:

  "Classify the following news into one of the six categories relevant to gold prices:
  (1) Geopolitical Event
  (2) Macroeconomic Data Release
  (3) Central Bank Policy and Action
  (4) Currency Exchange and Stock Market
  (5) Gold Supply and Demand
  (6) Other.
  Then briefly explain the reasoning."

2️⃣ Step 2: Score the News

• Goal: Evaluate the likely impact of the news on gold prices.
• Action: ChatGPT gives a sentiment score from -1 to 1, using 0.1 intervals:
  • -1: Very negative for gold
  • 0: Neutral
  • +1: Very positive for gold
• Prompt Example:

  "Based on the classification and content of the news, rate the expected impact of this news on future gold prices from -1 (very negative) to +1 (very positive), using 0.1 intervals.
  Provide an explanation for your score using financial reasoning."

3️⃣ Step 3: Rethink the Score

• Goal: Reduce short-term bias and improve rationality.
• Action: ChatGPT re-evaluates the score from a long-term macro perspective, revising it if necessary.
• Prompt Example:

  "Reflect on the score you previously gave for this news. Consider long-term market trends and macroeconomic context. Was your initial score too reactive or biased by short-term sentiment? If needed, adjust your score and explain why."

📈 Why Use CAR?

CAR outperforms all others in both return and risk-adjusted return by guiding the model through structured reasoning steps.

The Classify-and-Rethink method makes ChatGPT:

• Think contextually 📚
• Score thoughtfully 🎯
• Reflect long-term 🔍

…leading to more rational decisions, less bias, and higher alpha.