I get that this example is simplified, but doesn’t the maths here change drastically when the 5% changes by even a few percentage points? The error bars on Openais chance of succes are obviously huge, so why would this be attractive to accountants?

That's why you have armies of accountants rating stuff like this all day long. I'm sure they could show you a highly detailed risk analysis. You also don't count on any specific deal working, you count on the overall statistics being in your favour. That's literally how venture capital works.

(I think) I get how venture capital works, my point is that the bullish story for openAI has them literally restructuring the global economy. It seems strange to me that people are making bets with relatively slim profit margins (an average of 500m on a 10b investment in your example) on such volatile and unpredictable events.

What if your 10B investment encourages others to invest 50B and much of that makes it back to you indirectly via selling more of your core business?

I may be way off, but to me it seems like the AI bubble is largely a way to siphon money from institutional investors to the tech industry (and try to get away with it by proxying the investments) based on a volatile and unpredictable promise?

I think you’re right that the critical assumption in that example is the 5pct rather than the tax treatment.

AI has a lot lower bar to clear to upend the tech industry compared to the global economy. Not being in on AI is an existential risk for these companies.

False.

The existential risk is in companies smoking the AI crackpipe that sama (begging your pardon) handed them, thinking it feels great and then projecting[1] that every investment will hit like the first, and continuing to buy the <EXPLETIVE> crack that they can't afford, and they investors can't afford, and their clients can't afford, their vendors can't afford, the grid can't afford, the planet can't afford, the American people can't afford, and sama[2] can't afford, _because it's <EXPLETIVE> crack_!

The wise will shut up and take the win on the slop com bubble.

[1]: https://en.wikipedia.org/wiki/Chasing_the_dragon

[2]: For those following along at home, sama is Sam Altman, he was a part of the Y Combinator community a while back: https://news.ycombinator.com/threads?id=sama

I'm pretty the armies of accountants would have rated it higher if the cashflow was positive than negative. Negative can't be good even while accounting for taxes.

This reminds me of the scene in Margin Call [1] when the analyst discovers that their assumptions for the risk of highly leveraged positions are inaccurate.

[1] https://www.youtube.com/watch?v=QAWtcYOVbWw

If your accountants suggest that you take a single 5% chance deal, they probably skipped maths and statistics and you should fire them.

It's the dumb as rocks MBAs that will go head first into the 5% chance deal.

I guess the reasoning assumes that you have multiple eggs in your basket. A 95% chance of failure is bad if you're pinning the whole business on it, but if you have a variety of 5% chance deals, then it can make sense to pursue them, which is basically what venture capitalists do.

The whole thing will crash in the next few years. The economy will have its Wile E Coyote moment, all these "valuations" will evaporate overnight, the Shitcoins will instantly go to zero, the music will stop, and the bagholders will look down to find themselves in possession of their shiny new bag of pet rocks. (A few lumps of coal.) All of these mental flipflops people are using to attempt to justify current insane valuations will be revealed as the evidence of intellectual bankruptcy that they are.

It’s easy to predict that, but when has “the whole thing” ever crashed?

Sure, markets can crash, but this idea of “go to zero” never happens.

That’s the whole calculus of these investments. Many of them are expected to fail.

The fact that it’s painful to the average person means nothing to the people who run the system.

> 'this idea of “go to zero” never happens.'

Apparently you've never lived through the crash of a 'currency' which is based on a flawed mathematical concept. You'll get to experience what that's like (for the first time in history!) when it's revealed there is some kind of subtle flaw in SHA-256 which renders it worthless as the basis of anything important, let alone a 'currency.'

How do you sell your 'coin' to anyone when the market disappears at the speed of news? Yes, it will go to ZERO, INSTANTLY.

Guess what happens when the crypto crash is combined with a) collapse of the real estate bubble, especially commercial real estate; b) the ongoing IT crash that is only just getting started; c) whatever damage the (current, red-flavored) orangutan in the White House manages to accomplish in his 3+ remaining years of hell; d) fear of looming war; e) economic fallout from COVID which is still ongoing and expanding (hint--many destroyed businesses and people out of work); f) a thousand other icebergs, minefields, and financial hazards confronting us in the near future? Buckle up!

I don’t really see what’s relevant about crypto nonsense in this context. We are really talking about the overall economy especially in the tech sector.

Even if every cryptocurrency becomes worthless overnight, that doesn’t represent the market going to zero.

I see you’ve edited your comment with more doom and gloom. It’s easy to view everything as a bubble when you’re in a negative mental space.

> a) collapse of the real estate bubble, especially commercial real estate;

Any proof of this bubble? Housing construction continues to lag demand. Offices are largely RTO and Covid-era remote jobs are basically legacy and grandfathered. Every remote employee I know who was laid off in the past couple years had to get a hybrid/in-person job. You can’t just assume 2008 is going to happen again without some real data that shows real estate instability. Where are the poorly qualified borrowers?

> b) the ongoing IT crash that is only just getting started;

That’s one industry of many. One specific industry struggling doesn’t mean much.

> c) whatever damage the (current, red-flavored) orangutan in the White House manages to accomplish in his 3+ remaining years of hell;

Lame duck presidency, he can’t crash shit. Congress will be unfriendly next year and already isn’t even very supportive within his own party.

> d) fear of looming war;

In what universe is any impending war impacting the American economy? You mean the one where defense contractors are hiring and the US is selling weapons to the nations who are doing the fighting?

> e) economic fallout from COVID which is still ongoing and expanding (hint--many destroyed businesses and people out of work);

You are gonna need to explain this one and back this up with some numbers that make sense.

> f) a thousand other icebergs, minefields, and financial hazards confronting us in the near future?

Sounds like internal anxiety demons that are not tangible.

Look, I’m in full agreement that AI will face some kind of correction or crash, but predicting once in a century catastrophe is a losing game.

OK.

> A 95% chance of failure is bad if you're pinning the whole business on it, but if you have a variety of 5% chance deals, then it can make sense to pursue them

This is only true if the probability distributions for the values of the individual deals are rather uncorrelated (or even better: stochastically mostly independent).

Venture capitalists never take on a single deal. The same way you shouldn't put all your life savings into one stock, even if it has a 90% chance of working out. That's not how any of this stuff works.

Would you take 5% chance of earning 100 dollars if it would cost 1 dollar?

You cannot just scale down the numbers and pretend like the world around you doesn't exist. There isn't much I'll do with 1 dollar. There's a shitload Microsoft could do with 10 000 000 000 dollars.

Opportunity costs are a thing.

There actually becomes a point where there’s not that many things you can do with your money when you have so much of it.

This is especially true when your investors/owners expect you to generate better returns than the risk-free rate.

This applies to any spending Microsoft does. What does it have to do with OpenAI?

Also, classifying business expenses as "cost to the tax payer" seems less than useful, unless you are a proponent of simply taxing gross receipts. Which has its merits, but then the discussion is about taxing gross receipts versus income with at least some deductible expenses, not anything to do with OpenAI.

Thank you, that made perfect sense and in a very simple (simplified but relevant) way. Besides the idea that such risks get aggregated over a portfolio, I can also imagine how the raw numbers flipping from - to + may be useful to paint as acceptable to accounting a bet you want to take anyway for strategic reasons.

Those 150 billion will be taxable at the same (hypothetically 30%) tax rate, reducing the expected return by 45bn * 5% chance. The expected return is still negative; all this bet does is shift tax liabilities in time, which admittedly would matter to some people who subscribe to short-termism.

I guess to truly calculate it you need to estimate how long it will take to get the ROI (i.e. reach the point where you need to pay taxes on the 150billion). And add back what you can earn by investing the money you didn't have to pay taxes on. I'm not sure what the magnificent 7 can expect as a ROI on invested money though, given that they tend to have enough cash to invest anyways and just pay out dividends.