Is investing in AI still too much of a gamble?

AI is a subject both broad and confusing. It is also rapidly evolving: you can now be taught how to write a book by Agatha Christie, impressive given she died in 1976. More remarkable still are the high-quality scans that recently digitally unfurled previously unopenable papyrus scrolls that were carbonised during the eruption of Mount Vesuvius in 79AD.

As we gaze into a crystal ball that no-one really has, various investment schools of thought run the full range of possible outcomes.

This ranges from approaching a state of Utopia to humanity finally facing the Day of Reckoning. Either extreme seems to require or lead us to the Singularity, the point at which AGI (Artificial General Intelligence) becomes smarter than human intelligence, not just in narrow tasks like playing chess or spotting early signs of disease, but in the kind of general intelligence that means it can learn anything a human can, and more.

As the smartest AI models ever made still cannot beat the brightest teenagers at the International Mathematical Olympiad, which is exactly the sort of thing it should already dominate, given the key skills of logic, speed and a definitively right or wrong answer.

Are investors playing a game of chance to where AI will be more prevalent or how developed AI will become? It is all guess work.

Glass half full or empty?

A far-right-tail positive outcome might mean, for example, that growth rises exponentially, the cost of physical things diminishes to close to zero and we all have more than enough of everything, leaving oodles of free time since workers have become redundant.

A far-left-tail negative outcome involves something as innocuous as a “paper clip maximiser” (Nick Bostrom’s well-known analogy) unintentionally destroying humanity when tasked with making as many paper clips as possible. It seeks all resources to make them, eliminates anything in its way (including us), and converts all of earth into paper clip making material.

Both are examples of a small, well-meaning goal that when combined with exponential power leads to irreversible damage. Try as we might, investors cannot just turn it off and put the genie back in the bottle.

Real world positivity

A pervasive “winner takes all” mentality, the notion that all rewards will accumulate to only a handful of successes, leaving runners-up with little if anything of value, looks to be driving parts of the stock market today, Hence the continued domination of some of the IT behemoths. Microsoft recently became the second company to pass $4trn in market capitalisation due to strong growth in its cloud computing division, following in the steps of GPU chipmaker Nvidia. Meta also rose as advertising margins expanded because its AI means improved ad targeting and higher ad rates.

Alphabet, Meta and Microsoft added more than $350bn in market capitalisation in the last week of July alone. In contrast, Amazon and Apple both struggled despite good numbers, because there was less talk about their “superintelligence” story, stoking fears they may lose the AI arms race.

Talking of which, Microsoft will spend $120bn on AI infrastructure such as data centres over the next 12 months, while Meta is spending north of $100bn on, amongst other things, a data centre the size of Manhattan in Louisiana called Hyperion. It previously demolished a partially constructed data centre to redesign it for today’s chips, which require at least 10 times as much power as the previous generation. Mark Zuckerberg has also offered the brightest AI minds up to $100m as a sign-on bonus.

This is fine, amid strong demand for AI computing power and a growing backlog of orders. Yet the euphoria is starting to spread outside of the incumbents with their dominant market positions.

Figma, a maker of design software, surged 200% on the first day of trading, giving it a market capitalisation of more than $60bn, three times the $20bn that Adobe offered only three years ago. Elsewhere Mira Murati, former Open AI chief technology officer, raised $2bn to give her enterprise a valuation of $10-12bn despite having no revenues or products.

As the FT’s John Plender reminds us, scant details about what it is being worked on has echoes of the 18th century bubble-era flotation of “a company for carrying on an undertaking of great advantage, but nobody to know what it is”.

AI is here to stay and will significantly change things. On a micro level, we have already used it to carry out some of our more mundane activities such as updating processes and procedures documentation, saving up to 80% of the normal time involved.

On a macro level, it will upend economies, national security, governments and markets. AI is accelerating discoveries, reducing costs and increasing company attractiveness.

However, we remain cognisant of the fact that right now, crazy valuations, stratospheric pay packets and eye-watering expenditure plans are selling the AI narrative.

But it is only until AI craze calms down – when we realise who has gambled on the winner.