The four most expensive words in the English language are ”this time it’s different.” — Sir John Templeton

We’ve all been there. In fact, we are now potentially in the bust of another technology cycle.

Since the release of ChatGPT in November 2022, the number of AI companies established has significantly increased. The number of new companies launching with “AI” in their name has more than tripled, reaching 1,284 in the year following the launch of ChatGPT. This represents a 202% increase compared to the previous year in the UK alone.

By the way, here’s the podcast-style chat about this article if you prefer to listen rather than read.

Following the launch of ChatGPT, tech sector share prices show a significant upward trend. By early 2024, they have increased to around 140, indicating a solid growth of approximately 40% from the baseline.

The funny thing is, even if you are not an entrepreneur or an investor, you still contribute to this hype like everyone else. You talked about it, and you discussed this with your friend; you tweeted about it, and you blogged about it. Everything you do contributes to the collective madness.

I’m not dismissing groundbreaking technologies. There’s a difference between recognizing potential and losing our minds (and wallets) over the next shiny promises from reporters, VCs, or stock traders.

I know people keep using the dotcom bubble as an example. That’s probably the only example most people can talk about when referring to the historical technology boom-bust event.

Great job for landing on this article! I’m going to cover some major technological inventions and the relevant boom and bust in the last 200 years. You’ll have a healthy dose of skepticism, historical perspective, and a hype bingo card that covers the common themes of all these technology boom-busts.

Ready? Let’s dive in.

Time Traveler’s Guide to Tech Bubbles

Tech investment history is rarely about inventions but rather about the speculative frenzy that follows. From the canals of the 1800s to the internet boom, people repeatedly invested without fully grasping the competition or the disruption a new technology would bring.

Canals Mania:

It was the early 1800s, the Industrial Revolution was in full swing, and canals were the hot new thing. Sure, people were initially skeptical, but you know that canals are the next thing for transportation compared with a carriage or your legs. People bought canal-related shares and received dividends as high as 50%.

Then, in 1825 and the Panic of 1837, financial crises hit. Overall, canal profitability diminished, and the first railways became the dominant mode of transportation.

Railway Mania

It’s 1845, railways are the new hotness! You’re not about to miss out this time.

You’ve heard Cornelius Vanderbilt shifted from canals to railways. Smart move, you think. You’re snapping railway shares since you could buy them with a 10% down payment. Easy money, right?

The country’s gone mad for railways.

The country is an asylum of railway lunatics. — William Wordsworth during the Railway Mania of the 1840s

You’re not surprised — railways are gobbling up 7% of the national income. Parliament’s green-lighting 3,000 miles of tracks in 1845 alone!

But five years later, railway stocks nosedived by 67%. A third of these companies begged their larger competitors to acquire them.

You stare at the charts from 1830 to 1850 — railways authorized, investments made, share prices soaring, then crashing. Your “sure thing” looks more like a runaway train.

The Electric Showdown: AC vs. DC

It’s 1881, and you’re starstruck. Thomas Edison, the wizard of Menlo Park, has just launched his Edison Electric Light Company. You rush to buy shares at over $1,000 apiece—after all, Edison’s the next big thing — the Elon Musk of your day.

This is one of the best examples of how competing technologies within a revolutionary field can lead to market confusion and speculation. By 1884, the future suddenly looked less bright. The stock plummeted to $50.

Then you heard about Nikola Tesla and his alternating current (AC) system. It’s cheaper, more efficient, and can transmit power over longer distances. Edison insists his direct current (DC) is safer, but the market’s not buying it.

Ultimately, AC was the preferred electronic transmitter to power the 1893 World Fair. Even genius inventors like Edison can be blinded by their own biases, leading to poor technological and investment decisions.

Then, a merger happened and your share in Edison Electric Light Company was worth pennies.

Horse-Drawn Carriages to Automobiles: A Revolution on Wheels

Your friend, a steam engine engineer, invited you to start an automobile company. Your friend will invest with their knowledge, and you with your money.

In the early 1900s, 1,556 firms entered the US market. However, many of these companies did not survive the economic pressures of the 1920s and the subsequent Great Depression.

The Great Depression hit hard, and by the mid-1930s, only around 40 auto companies remained. Many companies went bankrupt, leading to a massive industry shakeout. By the mid-20th century, only a handful of major players remained. It’s a classic tale of innovation, overinvestment, and consolidation.

Your automobile investment had less than a 1% chance of survival. Even when a technology is genuinely revolutionary, most early entrants still fail.

Standalone Computers to the Internet: The Dot-Com Delusion

It’s the mid-1990s, and you’re still nursing your wounds from past tech bubbles. But then you hear about this thing called the World Wide Web.

By the late ’90s, there were 2,000 B2B e-marketplaces, and venture capital was flowing like cheap champagne at a Silicon Valley party. You decide to jump in. After all, everyone’s doing it. Who needs a solid business plan when you’ve got a catchy .com domain name?

The Nasdaq is on fire. In 1995, it was under 1,000. By March 2000, it’s rocketed past 5,000. Your portfolio is looking better than ever. You’re a genius! A visionary! You’ve finally caught the right wave!

But then March 2000 hits. The bubble doesn’t just burst; it explodes. By October 2002, the Nasdaq had nosedived 78%. Five trillion dollars—poof! Gone.

You watch in horror as your “can’t-miss” investments miss by a mile. Every five years, half of these dot-com darlings disappear. Your portfolio looks like a digital graveyard. It is closest to the current AI hype regarding the speed of technological change and the level of speculative investment.

The Psychology Behind the Hype

So now you’ve seen these events repeating in the last 200 years. Have you wondered why we keep falling for the same old tech hype trick?

It’s hardwired in every one of our brains.

First, there’s FOMO (Fear Of Missing Out), that nagging anxiety that you’re missing the next big thing. It’s not just about wanting the latest iPhone or FOMO-ing into crypto. This fear is rooted in our evolutionary past. Not being part of the group meant missing out on food or staying connected and relevant.

Then there’s the herd mentality:

The herd instinct among forecasters makes sheep look like independent thinkers. — Edgar R. Fiedler

This can be beneficial for social cohesion on most occasions. But also contributes to suboptimal decisions, like economic bubbles

Lastly, there’s confirmation bias. It’s like having a selective hearing, but for facts — we lap up any information that confirms our beliefs and conveniently ignore the rest.

The stock market is filled with individuals who know the price of everything, but the value of nothing. — Phillip Fisher

That’s why we’re quick to share videos about using AI to set up a million-dollar startup or use AI to automate all your content writing efforts, and so on. Put it all together, and you have a perfect recipe for tech hype that clouds our judgment and leads to some risky decisions.

The Cash Fueling the Craze

Money drives tech hype, often at breakneck speeds. Here’s why:

Speculative investing isn’t just about potential returns; it’s the thrill of backing the next big thing. This excitement can lead to extreme valuations, as seen with Nvidia in 2023. As AI fever gripped the market, Nvidia’s stock tripled, showcasing how FOMO can push valuations to dizzying heights.

In the short run, the market is a voting machine, but in the long run, it is a weighing machine.— Benjamin Graham

Nvidia is undoubtedly producing essential products to drive devices that run AI. But we don’t know whether its market value still accurately reflects its future value.

Low interest rates breed irrational exuberance. The SPAC frenzy of 2020–2022 exemplifies this. Cheap money fueled a rush of tech startups going public via SPACs, many with little proven value. As interest rates rose, valuations plummeted, exposing the risks of unchecked optimism.

Network effects amplify both growth and decline. The cryptocurrency market demonstrates this perfectly. The rapid rise and subsequent fall of FTX in 2022 shows how network-driven enthusiasm can quickly turn to panic when reality sets in.

Key Players in Tech Hype Cycles

Tech hype involves a complex ecosystem of players, each contributing to the cycle:

• Entrepreneurs balance vision and reality, sometimes prioritizing the former. Just think of Zuckerberg’s Metaverse in 2021.
• VCs and investors fuel trends with capital, often driven by FOMO. The AI boom of 2023 saw unprecedented investment in AI startups.
• Media amplify both successes and potential breakthroughs, sometimes overlooking limitations. Think of the Writers Guild of America (WGA) 2023 six-month strike, with a primary focus on protecting writers from being replaced by AI technologies.

Other players like early adopters and tech enthusiasts, and established tech companies’ executives leverage trends to maintain relevance, occasionally exaggerating potential.

Finally, governments and policymakers can inadvertently fuel hype through funding initiatives or regulatory changes, as seen in the global race for AI dominance.

1. History rhymes: From canals to railways, electricity to the internet, we’ve seen this movie before. The AI boom is following a familiar script.
2. Psychological drivers persist: FOMO, herd mentality and confirmation bias are as powerful today as they were 200 years ago. Our brains haven’t caught up with our technology.
3. Money talks: Speculative investing, fueled by low interest rates and network effects, continues to inflate tech bubbles. Nvidia’s 2023 surge is just the latest example.
4. The usual suspects: Entrepreneurs, VCs, media, and even governments all play their part in amplifying the hype. The WGA strike shows we’re already grappling with AI’s potential impact.

Here’s something for you to play (it’s a shame that Medium doesn’t allow me to embed this as a widget.)

Final Thoughts

Although burdened by the baggage of history rhymes, psychological drivers, and urges for money. This doesn’t mean AI is all hype and no substance.

Like electricity and the internet before it, AI WILL (at some point) transform our world in ways beyond everyone’s imagination. But history suggests a few key takeaways:

• Expect a shakeout: Most AI startups today won’t survive long-term. That’s not pessimism; it’s pattern recognition.
• Beware of inflated promises: If it sounds too good to be true in tech, it usually is.
• Think long-term: The real impact of AI will likely unfold over decades, not quarters.
• Focus on value: Look for products that improve efficiency, accuracy, or user experience. High value and high impact on users are the best predictors of long-term success.

Coming Next

I love history and money (like everyone else) and have a science and technology background. I will be constantly learning about technology and investment history. Also, I am starting a course on neuroscience, trying to understand how the human brain inspired the development of AI.

I will keep sharing everything I learned, just like this article.