The AI Prisoner's Dilemma: Bridgewater Predicts a Bubble Driven by Fear of Falling Behind

Imagine sitting at a casino table where the stakes double every five minutes. You are not sure the card will come, but if you leave the game now, your competitors will take the pot and push you out of the market for good. That, roughly, is how the co-chief investment officer of Bridgewater Associates describes the current state of the artificial intelligence industry. In a fresh report for clients, the world's largest hedge fund says plainly: we have entered a phase in which economic logic has given way to elementary psychology and game theory.

Here is how the situation looks. Giants such as Microsoft, Google and Meta* pour tens of billions of dollars into AI infrastructure every quarter. But they do not do it because every dollar invested returns two right now. The reason is that none of these companies can afford to fall behind a rival, even briefly. If one company decides to become more aggressive with its capital expenditure, the others have no choice but to follow. This is a vicious circle, which Bridgewater calls exponential growth in spending.

Such dynamics inevitably reshape the economic landscape. Huge flows of liquidity are moving out of traditional sectors into chip production, data centers and energy. But this is also where the main danger lies. When investment is dictated not by real demand or efficiency but by the need "not to lose," the specter of a bubble always looms on the horizon. We saw something similar in the late 1990s with fiber-optic networks: companies then also built infrastructure for decades ahead, hoping for endless growth, and ended up facing a harsh overcapacity crisis.

Bridgewater stresses that the risk of a bubble is now higher than most analysts think. When corporations invest out of fear, they stop asking about short-term return on investment (ROI). This creates an illusion of endless prosperity for the sellers of "shovels," the chipmakers and cloud providers. However, if end products built on AI do not start generating comparable profit within the next couple of years, this house of cards may begin to wobble.

Context matters here: Bridgewater is not the kind of firm prone to panic. It is a fund that lives on numbers and macroeconomic cycles. If it speaks of "bubble-like conditions," then capital expenditure data has already moved beyond the bounds of healthy market competition. We are watching a classic prisoner's dilemma on the scale of the entire global economy: each participant acts rationally for itself, but together they steer the system toward potential collapse.

What does this mean for the market as a whole? Most likely, we will see the frenzied spending continue throughout 2025. Nobody wants to be the first to hit the brakes. But history teaches that such races always end the same way: either the technology makes a sharp leap in monetization that justifies the costs, or the market faces a very painful correction when investors finally ask: "Where is the money?" For now, only the chipmakers answer that question, taking the lion's share of these panicked investments.

The key point: the current AI boom rests on corporate-scale fear of missing out (FOMO). Is that foundation enough to keep the global economy from overheating?

*Meta is designated an extremist organization and banned in Russia.