LIVE MARKETS-Tech goliaths face 'prisoner's dilemma' as investors turn wary on AI

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TECH GOLIATHS FACE 'PRISONER'S DILEMMA' AS INVESTORS TURN WARY ON AI

The AI spending boom is facing a growing financing challenge but executives may find it difficult to rein in spending without risking their competitive positions, said Alexander Lis, chief investment officer at Social Discovery Ventures.
Corporations face a "prisoner's dilemma" in deciding whether to slow spending, since any one company that independently announced a pullback could be punished by investors worried about rivals racing ahead, Lis said.
The prisoner's dilemma refers to a situation in which two parties would benefit from cooperating, but each has an incentive to act independently, potentially leaving both worse off.
"If you are the only one who comes and says that you're going to pause your capex, you could be punished harshly," Lis added.
The concerns underscore the pressure to remain at the forefront of the AI race. With nobody willing to blink first, the industry could be locked in an expensive spending cycle that investors are unwilling to reward.
To coordinate a slowdown in investment, AI companies could invoke safety concerns as a common justification, Lis said.
"I'm talking game theory, not a conspiracy theory, just to be clear," Lis said.
He added that the "infinite money glitch" of increasing AI spending to boost market valuations was losing steam as monetary support for markets waned, prompting investors to demand clearer evidence of returns from AI investments.
The risk is that neither bond nor equity markets may remain willing to provide capital at prices that make the buildout economically viable, Lis said.

(Niket Nishant and Jayasree Prabhu)
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