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The AI bubble may never have to burst; it might only deflate

It is crystal clear that we are in a financial bubble with artificial intelligence. The hype built around AI keeps increasing exponentially. But there is something different about the excitement built around AI than the one built around the internet in the late 1990s. The AI bubble does not seem to fear investors. It is as if they are willingly creating a bubble and deliberately ignoring the consequences associated with asset bubbles.

According to John Davidson from the Financial Review, the AI investment boom is a “déjà vu all over again” for experienced investors who lived through the dot-com bubble, blockchain, and Metaverse bubbles, who say they are now seeing attempts from startups to cash in on artificial intelligence in ways that are “completely nuts.”

Moreover, Davidson argued that there was a fundamental difference between the past few investment bubbles and the AI bubble. Indeed, fears that there was a dot-com-style investment bubble forming around AI were amplified last week when French startup Mistral AI reportedly received €105 million in seed funding, valuing the company at €240 million even though it has no products and only recently started hiring staff. The company, which was founded by former Google and Meta AI staff, hoped to build a European large language model that can rival the model used in OpenAI’s ChatGPT.

The Nasdaq Composite has jumped 39% so far this year, fueled mainly by massive rallies in AI-related stocks such as Nvidia, Alphabet, and Microsoft. Nvidia stock surged 192%, prompting some commentary suggesting the stock may be overvalued.

Wharton Professor Jeremy Siegel, however, believes that the AI stock boom hasn’t run too far. Indeed, he does not see the hype around the sector as a bubble and some other financial experts argue that the so-called “AI bust” is unfounded.

The reason why the AI bubble is fundamentally different from the dot-com bubble is that AI is becoming an integral part of our lives and people have started to accept the idea that artificial intelligence is here to stay. Businesses in the service sectors are all starting to implement artificial intelligence as part of their core operations to further increase efficiency; students are using it for their academic classes…etc. In short, businesses and people have already accepted that artificial intelligence will be part of our lives and we shall simply start accustoming ourselves to this new technology.

The internet, on the other hand, was a phenomenon not accepted by everyone. Many people did not necessarily believe in it. They saw it as a façade; as something doomed to eventually fade away. Indeed, even prominent individuals such as Nobel Prize-winning economist Paul Krugman predicted that by 2005, the internet’s impact on the global economy wouldn’t be greater than the fax machine. Of course, this prediction was utterly erroneous as the internet thrived and now become an integral part of our daily lives.

At the end of the day, it is all about the psychology of investors and how much they believe in the new thing. If AI is clearly here to stay, as it seems to be, then the bubble may not necessarily have to bust. It might only deflate. This means that the hype around AI investments will decrease but not to the point where a panic will necessitate the AI stock prices to fall.


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