The Big Market Delusion: why AI could cost investors dearly

Posted by TEBI on February 2, 2024

The Big Market Delusion: why AI could cost investors dearly



The potential for AI language models like ChatGPT is truly mind-blowing; without doubt, they will transform work, education and our daily interactions. Driverless cars will improve road safety, reduce traffic congestion and enhance mobility for those unable to drive. Plant-based and lab-grown meat alternatives will help to tackle hunger, benefit our health and drastically reduce the environmental impact of traditional animal farming.

But do technologies like AI, autonomous vehicles and “meatless meat” present significant investment opportunities? The answer to that is far less clear.

As ROBIN POWELL explains in his latest article for rockwealth, financial history is littered with examples of game-changing ideas that proved to be revolutionary, and yet left investors who tried to capitalise on them nursing heavy losses. The phenomenon is known as the Big Market Delusion, and it’s only a matter of time before it strikes again.


Reading the money pages in the weekend newspapers can be quite intoxicating. Most weekends there are articles about the next big idea to invest in. It might be artificial intelligence, “meatless meat” or driverless cars, for example. The ideas always seem so plausible. Journalists and fund management companies are highly skilled at weaving compelling narratives to reinforce the case for taking the plunge. But investing in the next big idea isn’t just a bad idea; it can also be very risky.

There have always been fashionable things to invest in. In the 1840s, for example, investors got very excited about railway companies. In the 1890s, believe it or not, bicycles were the next big idea. In the 1960s, when electronics was all the rage, a whole slew of companies sprung up with some garbled version of the word “electronics” in their name, which usually inflated their price, even if the company had nothing to do with electronics! In more recent memory, the late 1990s saw a rapid rise in the stock prices of internet-based companies, or “dotcoms”, driven by the excitement around the potential of the internet.

In all of those cases, the logic for investing appeared to be sound. Railways were a game-changing technology for the whole economy; bicycles enabled ordinary people to travel around more easily; electronics also transformed our lives, making complex tasks at work and home much simpler; and, as we all know, the internet has arguably had the biggest impact of any of those things.

In all four cases, however, most (yes, most) of the investors who tried to profit from these ideas ended up having their fingers badly burned.


The Big Market Delusion

Why, then, do new technologies that hugely benefit consumers and society often harm investors who try to capitalise on them?

Well, an important phenomenon for investors to grasp is the so-called Big Market Delusion. The concept was developed by Bradford Cornell and Aswath Damodaran in a 2019 paper called The Big Market Delusion: Valuation and Investment Implications.




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