Imaginative Integrity: How collective creativity creates bubbles (and how it works for us)

Are we in an AI bubble? You be the judge. This is a framework to think through it.

Every bubble in history has been a collective belief that our investments will create future cash flows greater than the investment. From the South Seas to the Great Depression to the Dot-Com bubble – faith has driven humanity even forward. 

But how is this faith infectious? How are we driven as a group, a market, a nation, or a planet to follow the herd? As you decide whether we’re in an AI bubble or not, it’s worth considering. 

There’s a lot of research on herd mentality in markets. Humankind’s ability to work together is the only way we were able to hunt, conquer vast lands, and protect our weakling babies and preadolescents. And Yuval Noah Harari has detailed how the mental map for collective work has created global faith in religion and trade, as much as it has unlocked the power of madmen and misers. 

Kahneman and Tversky also famously lay out a combination of biases that make us prone to following that collective action to our detriment, despite evidence to the contrary staring us in the face. Loss aversion (of investment principal and status alike), anchoring (to stale information), appealing to authority (of those we respect), sunk cost (of what’s already been invested) are a few highlighted biases. Their Nobel Prize-winning work also pointed out how System 1 thinking in a panic blocks System 2 first-principals thinking. 

If these group-, nation-, or species-wide frenzies are so damning, what is the upside? How have we not evolved away from these biases already?

First, we have not had enough time to evolve away from the biases that served us for the 300,000 years of humanity prior to the last 600 generations since we started domesticating animals (creating surplus food). Beyond that, I’ll argue – well, because it works. We’ll never move away from the frenzy. 

Economic bubbles start as a synchronous group faith in the future. They are driven by faith that each individual’s own investments today will generate more cash flows in the future. 

They are a natural part of development – a critical part of development. We only call it a bubble when these simultaneous bubbles of faith burst. When the harvests, the outcomes, or the cash flow does not cover (and beat) the true cost of investment, we call it a bubble. Otherwise, we call it growth. 

Humans have a concrete belief in the in-concrete future. This is one of the oldest behaviors that humanity – and our ancestors near and distant – have engrained in every cell in our body (as I promise to detail in a future post ;). 

We have developed the ability to imagine a latent space in which many future worlds exist at once, measure them, and judge the right outcome. This beautiful ability to imagine a future so sensory-driven and lifelike it induces hormonal and emotional state changes defines us. It enables us to grow, to develop, to overcome the insurmountable – and yes, it leads to bubbles. 

Four years ago, I wrote a piece on what I call Imaginative Integrity. 

This is the mechanism that enables leaders – founders, politicians, philosophers, and madmen alike – to breathe their imagined future into existence. It’s also the core behavior behind bubbles. 

In the years since, I’ve described this process as (1) starting with a kernel of truth or insight, and (2) blowing it into a bubble of imagination: something beyond just what is tangible today. 

I’m honored to work with founders and investors every day as they take those first steps of making the bubble a reality. Day in and day out, they toil away at making that figment of their imagination real. 

They build towards their roadmap, recruit extraordinary talent to their cause, and relentlessly iterate on error after error, problem after problem, roadblock after roadblock with unerring faith of the tangibility of that bubble. Founders hire a few ardent believers, raise seed-stage capital, and find only those customers desperate enough to throw out their own biases in favor of a “maybe” with a new team.

Soon enough, (3) that first layer of the bubble has started to show integrity – it is real, it is something. These bubbles start small. But (4) as those first layers of the bubble are executed against, they become tangible enough to sell to the next layer of slightly more conservative believers – corporates, junior employees, specialty media, and more early-stage capital. 

At (5) each progressive layer added to the bubble, founders move from the innovators to early adopters, and from early adopters to the majority. The imaginative world founders had envisioned has been executed against stage after stage, layer after layer. It has grown to have sufficient integrity for large corporates to trust, competitive hiring, broad-based media, and growth capital to pile in. 

When the beauty of human innovation and execution – imaginative integrity – happens at scale, bubbles can happen. It can either be an exogenous negative supply shock, a single new technology or capability, or simply the realization that demand isn’t ready (often yet). 

Each new imaginative bubble layer offers founders a momentary reprieve to execute under – and repeatedly come back with positive results. A single founder or company’s building integrity and belief at one layer buys them faith in execution of the next layer of disbelief.

And each layer is allowed to be further and further from the last executed stage. More integrity allows for greater imagination. The ultimate goal is to recover the time, capital, and resources invested. In the case of founders, more cash flow than the capital invested – and with a decent rate of return. 

If founders and companies execute, they turn disbelief into belief. If they can create the value, the demand, and the cash flows expected under this veil of uncertainty – the alchemy of entrepreneurship, they are heralded as savants and Wayfinders. 

If, however, multiple founders and companies’ individual veils of uncertainty merge – this becomes a bubble. Demand can dry up, impassable chokepoints appear, or customer behavior dampens in the midst of a frenzy. 

In some technological waves or revolutions, demand is ready. Agricultural revolutions, for example, have largely had supply soaked up by demand. While there have been chokepoints, there have not been big busts, as there are no structural barriers other than increasing existing trade routes to absorb new supply. There are no famous bubbles produced by agricultural innovation: the exotic livestock craze of the 1980s was speculative and the tractor boom of the 1920s was technological (not enough people could afford or use them).

But booming supply of many new technologies isn’t always just taken up by the masses. It’s new, uncomfortable, or requires new skills. Like tractors after the First World War, most technologies are passed along relatively slowly from the early adopters to the early majority – much less further to the late majority. 

Each individual imaginative bubble offers founders a Schrödinger’s Cat moment, where success and failure are both apparent. A moment waiting for small, incremental successes to confer integrity onto that layer of imagination. If those dreams are uncorrelated, they are robust to shocks or problems that arise. If correlated, like mortgage-backed securities in the Great Financial Crisis, you know what can happen.

We’re in a moment just like this today. Private markets have breathed billions of dollars of faith into a collective (and highly correlated) bubble of disbelief – praying for value to pay off, and belief to ensue. The capital offers enough time to execute and generate cash flows that substantiate that bubble – bringing integrity to the imagination. 

The left-hand/right-hand pocket of Big Tech companies and Nvidia bankrolling AI Foundational model companies invested in by both can play out in two ways. 

If the cat is alive, demand for AI is robust and right around the corner in a diverse set of corporates and private companies alike. Users quickly expand away from their own core investors, confirming the integrity of their founder’s imagination. Cash flows on a unit basis start sooner rather than later.

If the cat is in fact dead, the Millennial Generation isn’t as ready to change their behavior as we’d hoped. Corporates and governments will put up barriers. Today’s circular investments and revenues coming from two different pockets of the same pants will look foolish. 

The question is then whether we get over that hurdle into a diverse and endlessly growing group of AI customers or not. We should be asking the accounting and HR departments at companies around the world – are you ready? Do you know what’s coming? Their answer – ready or not to take up AI – tells us the state of Schrödinger’s Cat today. 

And no matter what – whether this is just the beginning or a bubble set to burst, this will not be the last. Humanity runs on imagination, on a future which has yet to exist. We run on the same impulses that create bubbles – and let them occasionally burst. 

To expect us to be less creative, less risky, less imaginative would be simply inhuman.

About the author

Owen Reynolds is Investment Director, VC at Innotek, a family office investing in venture capital, private equity and direct investments. Previously, he spent nearly seven years at Expon Capital, holding investment and portfolio advisory roles.