Allianz chief economic advisor Mohamed El-Erian says the artificial intelligence boom contains undeniable bubble dynamics, even as it continues to attract massive investment.
In a new interview with Yahoo Finance, El-Erian says the AI wave is best understood as a “rational bubble,” where huge potential rewards justify aggressive risk-taking, even if many investors get burned.
“We believe that we are in a rational bubble. So yes, there are elements of a bubble. And there are three elements in particular of this bubble.”
El-Erian says the first danger lies in the massive capital flowing into foundation model builders, even though he believes most will not survive.
“First, the frontier, those working on foundational models, not all of them are going to succeed. And yet all of them are attracting significant investment.”
The second issue, he says, is that the US is failing to build the systems needed to actually deploy AI at scale.
“Diffusion isn’t being talked about enough. Diffusion means getting AI into the workplace in an orderly fashion, in a comprehensive fashion. We don’t have a diffusion policy so far. Other countries, China does, the UAE does, we haven’t.”
The third red flag, El-Erian warns, echoes the dot-com era.
“And then you and I remember the dot-com era. We remember companies simply putting a label on what they do and attracting investment. Well, that label today is AI.”
He says the rational approach is to recognize that the upside is large enough to justify AI overexposure at the risk of seeing some investments fail.
“So there are elements of a bubble, which means that people will end up with losses. But the aggregate value of what’s being created is significant. It makes sense to take a venture capital approach to AI. The payoff is so large that it is rational to have multiple investments and to overinvest.
The good news is that it’s a construct that will make us more innovative, more competitive. The bad news is there will be tears, there will be losses, because elements of it are elements of a bubble.”
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