The phrase “don’t buy the hype” is often used to describe untested technology, and can be sound advice for a novice investor. However, such advice should also be paired with the warning that if we fail to invest out of fear, we may “miss the boat.” If this cycle sounds familiar, it’s because it is. Everything from crypto and electric cars to AI is impacted by it. Understanding this phenomenon is important not only for investors like Warren Buffet but for policymakers too, as overregulation can limit the technology’s potential.
One of the first people to observe that novel technology is usually overhyped in the beginning and underestimated in the long term was Stanford computer scientist Roy Amara. Since then, many other notable entrepreneurs and academics have noticed the same phenomenon (notably Bill Gates, which is why some call this the “Gate’s Law”).
It begins with the initial stage, innovation, which garners stories and speculation about the technology’s implications. We see this with new AI products that breed predictions about large economic disruptions and utopian predictions. Because the technology in question has created no value up to this point, people have nothing to damper their expectations.
After this, disillusionment sets in as more facts about the technology become known, often culminating in one or more publicized failures. We see this all the time, whether it is in a self-driving car crash, a major crypto scandal, or an accusation of AI stealing intellectual property. These failures are later cited as examples of why people “shouldn’t have bought the hype.” Some even go so far as to declare the novel innovation dead. All the while, advancements are being made to improve the initial innovation and closing of the gap between public perception and demonstrated value.
The result is often a quieter mainstream adoption. We can already see this occurring as more graphic design software adopts AI image generation, making it as commonplace as shaders and cropping.
The reason this occurs so frequently is described in two books by American computer scientist Ray Kurzweil, How to Create a Mind and The Law of Accelerating Returns. Kurzweil notices that there is a difference between how people conceptualize technological growth and how that growth often occurs. The public usually thinks of growth in linear terms, steadily increasing with time. In reality, technological advances compound, effectively accelerating with time. The difference between linear expectations and compounding reality explains why expectations will, at first, exceed reality (since linear growth is initially small), but reality exceeds expectations in the long term.
For policymakers, the problem is that, according to this model, public opinion often turns against the novel technology before it has even had the opportunity to blossom. A public scandal, like a driverless car crashing into a pedestrian, can “prove” to the public, and thus policymakers, that the technology was all hype or in need of regulation.
This phenomenon is most observable in the crypto space, as a year of scandals from the collapse of Terra and FTX spurred public criticism of the technology. Using these events as a catalyst, Elizabeth Warren has proposed aggressive new regulations for the crypto exchanges. If enacted, her bills would essentially end decentralized exchanges by mandating know-your-customer rules on a technology that defies such parameters. Even the most modest of regulatory proposals run the risk of slowing innovation, making the eventual growth beyond linear expectations take even longer.
It is the sad reality that our linear way of thinking is an obvious blind spot.
Though policymakers owe it to their constituents to listen to their concerns, they must be careful to not fall for temporary ebbs in public sentiments which might ultimately lead to harmful policies. It is important to try and see technological development for what it is: a compounding of innovations that produces value.
Isaac Schick is with the American Consumer Institute, a nonprofit education and research organization. For more information about the Institute, visit www.TheAmericanConsumer.Org or follow us on X @ConsumerPal