AI's Bar Mitzvah moment: Damodaran on AI for biz
Artificial intelligence continues to captivate investors, with advocates and skeptics holding opposing views on its potential. Aswath Damodaran, a renowned valuation expert, argues that revolutionary change has always been a constant in human history, following a cyclical pattern. In a lengthy blog post, Damodaran contends that the AI debate has become muddled, with supporters and detractors often speaking past one another.
Advocates focus on AI's vast potential market, while skeptics question the feasibility of the upfront investments required.
Damodaran urges the discussion to shift towards examining AI as a business, recognizing its groundbreaking nature while acknowledging the need to evaluate it like any other business in history. He notes that AI optimists may be correct about the potential for AI usage to explode in the future, but he asserts that just because a market is large does not automatically make it a strong business.
Similarly, he acknowledges that the significant capital expenditures associated with AI can increase the risks for businesses but does not necessarily doom them to value destruction.
Throughout human history, revolutionary changes have come with both benefits and drawbacks. When these changes render certain jobs obsolete, they can lead to widespread layoffs and economic disruption. Damodaran warns that as AI adoption accelerates, businesses may face significant challenges, including the potential for massive layoffs in the tech sector.
However, he emphasizes that every major disruptive change follows a predictable four-phase cycle: a period of hope and hype, followed by a phase of build-up, then business building, and finally, a recalibration period.
Currently, AI is in its early stages of business building, with companies beginning to generate revenues from AI-generated products. While the revenue is still small compared to the massive capital investments, AI shows promise in terms of revenue generation, pricing models, and business models. However, Damodaran warns that the "big market delusion" may occur during the build-up phase, leading to overconfidence among companies and investors.
In the next phase, companies and investors must recalibrate and assess the true impact of AI on profitability and the broader economy.
Written by urgent.news from The Economic Times's reporting — not their text. Machine-written — may contain errors; check the original before relying on it.
