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Sam Altman, OpenAI\u2019s chief executive<\/p>\n
MANDEL NGAN\/GETTY IMAGES<\/p>\n
Damodaran believes that AI is going to make businesses less profitable, but that there will be a smaller group of companies that will become big winners thanks to the technology. Those fortunate ones will \u201csell the [AI] products and services that companies buy to make themselves less profitable\u201d. To win in the era of advanced AI, they will have to create exclusivity around a product or service, either by tying data to an AI product, or building something that nobody else has yet built.<\/p>\n
His response to those who argue that AI will boost profits across sectors as companies become more productive and efficient?<\/p>\n
\u201cThis is what happens in game theory, when you act like you\u2019re the only person moving and the rest of the world stays still, right? So as people say that, I say, OK, that sounds nice, but what if your 99 other competitors are doing exactly what you\u2019re doing and they have access to the same [AI] products you bought? [\u2026] The next thing you do, you\u2019re on this price cutting mission where at the end of the process, you all have lower costs, you all also charge lower prices. And if history is any guide, you all end up with lower margins on those lower prices than you did before.\u201d<\/p>\n
Uncertainty around the impact of AI on markets grew last week after a viral Substack post by a little-known New York research outfit posing a doomsday scenario for the US economy in the age of superhuman AI was deemed partially responsible for a sell-off.<\/p>\n
The Citrini Research post, titled \u201cThe 2028 Global Intelligence Crisis\u201d, forecast a hypothetical scenario whereby AI advances by June 2028 lead to widespread white-collar job losses, and a prolonged downturn and financial crisis. <\/p>\n
The fallout from the post laid bare the nervousness of investors about the sustainability of the AI boom. Even after a market rebound last Tuesday, the report stoked debate on Wall Street about what AI means for the economy and corporate America.<\/p>\n
Damodaran said he is very wary of any scenario analysis like the Citrini report. However, he said: \u201cIs it possible that a terrible outcome could come out of AI? Absolutely. And it\u2019ll happen either because AI works really well, really soon; or really badly, really soon.<\/p>\n
\u201cLet me explain: if it works really well, really soon, and it does the jobs of bankers and consultants and software engineers, the problem is tons of people are going to lose their jobs, and then where are they going to go? [\u2026] They now lose their jobs and their income.\u201d<\/p>\n
\u2022 Meet the AI refugees: white-collar workers retrain as teachers<\/a><\/p>\n He added: \u201cAt the other extreme, you could have AI that doesn\u2019t work out at all, and this is a pipe dream in the minds of founders who think they\u2019re going to change the world. Silicon Valley is full of them.\u201d If that happens, some of the big tech companies, such as Amazon, Meta Platforms and Alphabet would have to write down tens of billions or hundreds of billions of dollars of investments they should not have made, he said. That would affect their employees, shareholders and investors in S&P 500 index funds. <\/p>\n More pain would be caused due to the fallout from AI companies that have invested in data centres and chips using private credit. However, he does not think it would be \u201c2008 kind of crazy\u201d because private credit is not as big a segment of the lending market as banks and corporate bonds.<\/p>\n Damodaran believes that the true impact of AI will \u201cfall somewhere in the middle\u201d of those two extremes. He said: \u201cI think AI will work, not as well as people claim it will, and not as easily monetisable as people think it is.\u201d<\/p>\n The academic has built up a geographically and sectorally diverse investment portfolio, which includes big tech stocks, over the years. He personally trades very little, buying and selling up to four stocks a year. Two of his investment rules are: \u201cDo no harm and act as little as you can\u201d. About 15 per cent of his portfolio is currently in cash, the highest proportion it has ever been.<\/p>\n