Water Cooler Small Talk, Ep. 10: So, What In regards to the AI Bubble?

is a special form of small talk, typically observed in office spaces around a water cooler. There, employees continuously share every kind of corporate gossip, myths, legends, inaccurate scientific opinions, indiscreet personal anecdotes, or outright lies. Anything goes. In my Water Cooler Small Talk posts, I discuss strange and typically scientifically invalid opinions that I, my friends, or some acquaintance of mine have overheard within the office which have literally left us speechless.

So, here’s the water cooler opinion of today’s post:

Phew! 😅 There’s quite a bit to unpack here. Unlike the opinions I often discuss in other Water Cooler Small Talk posts, for this one, there is no such thing as a easy, straightforward answer. AI is clearly a formidable technology, of course, the breakthrough of our time, and just a few years ago, we could only imagine such things inside the realm of sci-fi.

Having said that, we cannot deny that there’s a certain to it — at the least in its current state. For example, Mira Murati‘s (OpenAI’s former CTO) latest company, Pondering Machines Lab, is currently valued at $12 billion, mainly, with no product. On top of this, NVIDIA hit an astronomical valuation of $5 trillion just a few weeks ago (roughly equal to the GDP of Germany, for scale).

Undeniably, operating AI models is a relatively expensive hobby, with no real returns so far. Firms like Anthropic and OpenAI pay billions to run their fancy models (operating ChatGPT alone costs $700,000 per day), but at the least for now, they get back pennies and operate on a net loss. So what’s happening? Is there a hidden piece of tech that may suddenly be revealed and render this whole mechanism sustainable? Are all these tech billionaires just fools? Are they scammers? Have all of us been tricked into believing in an inconceivable, extremely expensive future? Or are we heading towards an AI winter, and that might be it?

💹 What concerning the dot-com crash?

The preferred argument of individuals calling AI a bubble is the dot-com crash of the late ’90s. But in point of fact, there have been loads of other bubbles long before the dot-com bubble, sparked from some technological breakthrough. For example, we are able to consider the railway mania of the 1840s or the radio boom of the Nineteen Twenties.

In any case! Something that folks appear to forget when comparing the present state of AI with the dot-com bubble is that almost all of the dot-com corporations that failed back then mainly had no proven business model. Specifically, within the late 90s, there have been a number of startups operating on funding and the promise of an Web-fueled future, but that they had no real business model of the best way to actually make cash. Online ads weren’t really a thing yet, and a number of those corporations essentially had no solid marketing strategy.

Against this, most of today’s AI corporations have a structured business plans. And in contrast to within the ’90s, people — each individually and inside organizations — are very aware of the concept of for stuff online. Unlike the 90s and the 2000s, the concept of free stuff on the web — like, for instance, torrenting, or free value on the whole — is gone for good. We at the moment are well aware that for those who want something precious to return out of any screen, you’ll want to pay; otherwise, you’re only going to get ads, noise, and a foul experience.

Even for essentially the most famous dot-com flops (think Pets.com or WebVan), the premise of the concept wasn’t incorrect. Pets.com delivered pet supplies to retailers, something that widely exists today and is a legitimate, no-nonsense business idea. Similarly, WebVan made home deliveries for stuff inside 30-minute windows, a market that bloomed 20 years later through the COVID-19 lockdown, with services like Uber Eats or Amazon Prime. Thus, it isn’t the business idea or the technology itself that results in a ‘bubble’, but relatively its execution and the way mature the market is for such an idea. So, my tackle tech-driven bubbles would generally be that the technology itself often has value, but it surely is likely too early, and the world is immature for all this potential to be implemented.

💸 Are all those tech billionaires just fools?

So, if the market is relatively immature for AI, why do all those corporations keep investing so heavily in it? Don’t they know any higher? What do they expect to occur aside from an AI market crash?

The short answer is that they’re all just expecting the computing power to get cheaper.

Up to now, faster and cheaper computer chips have solved a number of tech riddles that were regarded as unsolvable. Looking back to the primary thoughts of humanity about AI, people were wondering if they might construct a program to beat humans in chess. Funny how chess was considered an activity requiring very high human intelligence, so naturally, it might function a superb measure of an intelligent machine. A machine that is nice at chess couldn’t be but an intelligent machine. Nevertheless, programs beating humans at chess were eventually made possible, not by discovering some fancy algorithm, but by implementing the identical computing algorithms with increased computing power. And this is strictly the sort of thing everyone seems to be awaiting to occur with AI.

Specifically, AI at its current state is just too expensive. It doesn’t make sense financially since it costs a number of money to run such models, and it stays to be seen who can be willing to pay . For example, for OpenAI just to interrupt even for its ChatGPT Plus plan, it might have to charge about $50 monthly, which is greater than double its current price. Thus, creating faster and cheaper chips would allow them to render the whole means of developing and operating such models more cost-effective, allowing those corporations to finally break even. In other words, hardware progress is the lever that might make AI sustainable.

I can’t help but mention Moore’s law at this point, cliché as it could be. Moore’s law is the remark that the variety of transistors on an integrated circuit tends to double roughly every two years, resulting in exponential improvements in computing power, efficiency, and cost-effectiveness over time. Although classic Moore’s law is now form of over (progress has plateaued within the last decade), the underlying mindset it has created (the expectation that computation will keep getting dramatically cheaper) still shapes the expectations of today’s tech giants.

Replacing CPUs with GPUs allowed for parallel processing and removed the physical limitations that existed previously. With the rise of ever-larger GPU clusters, computing power is predicted to continue to grow for years to return. And that is why everyone seems to be so bullish about this.

🤔 So, where is the bubble?

A number of weeks ago, Michael Burry placed a $1 billion bearish bet on NVIDIA and Palantir by buying put options on each stocks. Michael Burry was the one who famously shorted the housing market back in 2007, and essentially, predicted the whole 2008 housing bubble and subsequent financial crisis. So, naturally, when he called out the alleged AI bubble and market crash, everyone held their breath for a minute. Later in November, he mysteriously firm. What a daring method to declare that we’re in a market top!

But again, the thing is that AI is fundamentally different than the housing bubble. There is just a lot we are able to do with houses, however the potential upside of AI is really unlimited. It’s relatively a matter of when and never if, because AI goes to completely transform the world eventually. And in contrast to housing, its value isn’t arbitrary; AI is a classy technology, a miracle of engineering, having inherent value tied to the labour of the nice minds that worked to place it together. On the flipside, houses have been inbuilt the identical way for a whole lot of years, with minor technological progress. It’s easy to dismiss AI as a speculative bubble, simply because we will not be equipped to grasp it.

I believe that it’s more appropriate to match AI with other technological booms related to laying some form of infrastructure, like electricity, telephone, or the web, even rail. Oh, but rail mania was a speculative bubble, wasn’t it? Well, was it? The technology itself wasn’t a bubble; laying a rail infrastructure was not speculative and had real, no-nonsense value. The thing is that other alternatives aside from rail eventually emerged, like automobiles, airplanes, or piping, condemning the rail to never fulfill its potential. In other words, the transportation need was ultimately shared amongst several different markets aside from rail. The bubbliness originated from assuming that the rail goes to be the one technique of transport ever. Thus, a meaningful AI bubble would require another, magical technology to substitute for a part of its potential.

In any case! Similar to the web, the predominant value of AI originates from whatever comes next and sits on top of it. Laying the electrical grid allowed for a bunch of electrical appliances sitting on top of it to be created afterward; constructing the web allowed for a bunch of apps like Google or Facebook to be created afterward. Naturally, whoever lays the infrastructure for anything goes to be paying of cash, because they essentially pay for whoever is coming next. Nevertheless, this doesn’t mean that the technology itself isn’t precious, and doesn’t have the potential to steer to further substantial growth.

That leads us to a very important insight: for AI to make sense financially, a bunch of successful and meaningful things sitting on top of it have to be created. The investment within the infrastructure itself doesn’t make sense if it isn’t ultimately used as an infrastructure. So, that is the true bet, the true query one needs to reply. The technology is there, the investment is there, the infrastructure is there; now it stays to see if enough truly useful stuff is built on top of it.

On my mind

I do know this post might age like milk. 🤷‍♀️ Possibly in a few weeks or months, I might be reading it and wondering what on earth I used to be talking about. Still, AI is genuinely impressive: a classy technology with the potential to remodel the world permanently, very like electricity or the web, and to set the stage for a completely latest era of technological growth.

📰 💌 💼☕

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