The AI Revolution: From Linear Regression to ChatGPT and beyond and How It All Connects to Finance

Abstract

This article surveys the evolution of machine learning from linear regression through ChatGPT to fully unsupervised learning. We illustrate the advantages of artificial intelligence (AI) over traditional methods with simple intuitive examples for the US equities markets. We also show that the AI inferences are consistent with classical finance models, such as the capital asset pricing model. We also describe how, unlike machine learning, true AI unsupervised models satisfy the optimal modeling characteristics. Most importantly, we show step by step how AI identifies and extracts signals from data.