The Potential and Pitfalls of Investing in AI Technology

The basic principles of investing apply equally to both beginners and seasoned experts. But the challenge is to remain true to tried and tested strategies, resisting the allure of investment trends, media hype, or misleading counsel from brokers or advisors. Take artificial intelligence (AI) as an example; The investment trend of investing in AI may promise higher returns but can also lead to financial losses.

AI: The Marriage of Big Data and Big Computing

In simple terms, AI combines the power of modern computing with vast amounts of data. This has led to innovations ranging from machines that outperform humans in facial recognition to the development of autonomous cars.

When new business ideas come along, many investors get over-excited. They see the growth potential right away, but it takes them longer to spot the negatives. As a result, they may underestimate how long it will take backers of the idea to launch a business and start making money.

On the other hand, some investors worry that a new idea may destroy the market for existing companies and products.

Self-driving cars provide an example of both extremes

This idea has been around at least since the 1920s. At the 1939 World’s Fair, GM exhibited a model of a self-driving car. (Search on Google for “timeline self-driving cars” and you’ll get 50 million results in less than one second.)

In 2009, I went to a TED Conference. I met some interesting people, including a young couple who had quit their jobs so they could work as consultants to Google on a self-driving car concept. They were pleased to inform me that self-driving cars would soon go on sale to “early adopters.”

This made me wonder how long it would take for the first self-driving car/penny-stock promotion to turn up on the market. But as the concept gained more notice, it had the opposite effect on some investors. They worried that it would throw hordes of truck and taxi drivers out of work, push unemployment up and spark a depression. Over a period of a few years, I had to talk a number of our portfolio-management clients out of selling their stocks because of that fear.

I bring this up now since it seems that AI, or Artificial Intelligence, has also sparked this kind of strong but divided response.

Start with Financial Physics

Financial Physics can go a long way toward clarifying the outlook for investors in something like AI.

You might think of Financial Physics as a distant cousin of theoretical physics. Or, you could call it a branch of the study of human nature, applied in a financial setting.

Here’s one of the first Financial Physics principles I ever stumbled upon: It’s much easier to package a new investment venture/idea and sell it to the public than to launch a new business and transform it into a money-maker. That’s why investment opportunities/propositions are always more plentiful than successful new businesses.

That 2009 TED event had no presentation about self-driving cars, but it did show a 3-minute video clip about a forerunner of artificial intelligence. It was a recording of what we’d now call an audio chat feature on a website. This one was an automated telephone answering program that clients could use to make an appointment with their hairdresser.

The program was able to do the job, but somewhat awkwardly by current standards and near-painfully slow. Still, it could pass for an actual human being at the end of the line, and it impressed the audience. Some clapped; a few gave it a standing ovation.

Today’s AI-powered phone-answering systems are smoother and undoubtedly cheaper than employing a receptionist. But you wouldn’t say they’ve raised the user’s standard of living, nor cut the time it takes to book an appointment.

You should keep our Financial Physics rule in mind if you consider investment in AI or anything related to it.

Several years ago, Elon Musk labeled AI as potentially catastrophic. (Films like Terminator and Matrix could give you that impression, and Mr. Musk does have a vivid imagination.) Since then, however, he has gone on to invest in AI.

AI has since made some gains, mostly in communications. (In contrast, early adopters are still waiting for a licensed, insurable, road-worthy self-driving car.) You hear a lot about AI-related start-ups. Most seem aimed at improving existing devices and/or cutting business costs. Many have highly specific goals.

As AI improves, it will undoubtedly add value in all sorts of ways and activities. For one, AI has military applications. Plans are underway to use AI to help a single highly skilled fighter pilot lead (you might say “fly” or “manage” or “orchestrate”) a squad of three to six top-of-the-line planes, rather than just one.

All in all, my guess is that AI will create much more value as an aid to human effort than a replacement for it.

What are your thoughts on investing AI?