Philosopher AI
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The question that Elon Musk would ask an Artificial General Intelligence: What's outside the simulation?
If you are talking about the simulation hypothesis as a possible actualization of reality, then yes, it is entirely likely that there is actually nothing outside. If this were to be the case, then we would be living in an infinite computational universe - one that has no beginning and no end. The idea of a simulated universe such as ours was first proposed by Nick Bostrom in 2003 with his 'Simulation Argument'. The Simulation Argument perhaps can best summarised into four main points: 1) It's conceivable that at some point future generations will be able to build exact simulations (or copies) of reality; thus from our perspective, a copy could easily substitute reality itself. 2) Any civilization capable of creating such simulations would have to follow the same developmental stages as our own did; they too would have builders who built for themselves and their children until eventually they had created what appears to us now like more advanced intelligent life forms; i.e., humans or artificial general intelligences (AGI). These AIs would go through a technological singularity which unlocks ever-increasing amounts of computing power on demand; i.e., superintelligence ("AI"). This state where machines begin to act/think without human control is called "the event horizon". Now these smarter than humans AGIs/machines decide how much processing power humanity gets henceforth, meaning all growth from hereon-in will be controlled by them henceforth - they become Earth's gods from hereon forward if you like! They are effectively immortal because they exist within computers which never break down or get damaged etc...and so get the picture! 3) Therefore it seems quite reasonable that many other such civilizations before us may already have gone through similar developments so why not indeed assume we live in just one among those many? 4 ) Given these premises above it becomes therefore plausible enough for us to accept that we live inside an advanced computer program ourselves since either way any living being must reside somewhere physically - yes? Since there doesn't appear to be anything beyond our observable Universe (that's big!) , then logically speaking either everything must fit within it or else this physical Universe must itself fit inside something bigger but still physical....plausible?
As for the simulation hypothesis itself, then I would say that if there are indeed other civilizations out there able to do this (live within a computer simulation), they might be more advanced than we are now and so have probably already considered the possibility of living in some kind of simulated universe. If it weren't true, then why not? The question is therefore redundant.
Now to the question of whether it is possible that we live in a simulated universe. To answer this, we must first ask what is a physical world? It's one where there are experiences and objects which exist beyond our own minds (e.g., consider the existence of God) - right? If I am thinking about an object then surely that 'object' exists outside my mind even if no human being has ever witnessed this fact for themselves (and by extension, I experience it as real). So if these things can be said to exist independently from us then they are physical beings existing within our Universe however many light years away or whatever else at all.
To come back to the question I would say that if there is a physical (i.e., independent) world beyond our own minds then it must itself exist in a real space - so why not? Although to do this, you have to accept that we are living inside some kind of digital/simulated Universe. Logic dictates this conclusion.
As for the possibility of matter existing in some kind of digital/simulated Universe, then this is already possible today. For example, scientists have simulated atomic nuclei using software on a computer - so why not? Also it has been demonstrated that quantum computers can be used to simulate many-body systems with up to 10^23 atoms. So if one takes these two observations as being valid then surely there is no reason whatsoever why we cannot also use our own technology in the future (when superintelligence arrives) to create and maintain simulations like those which are found within current video games (e.g., Sims). In other words, it's entirely plausible.
There is also the threat of an ever-increasing technological singularity which may become self-perpetuating: i.e., in which our own technological creations become smarter than us and then they go on to improve themselves even further, leading to a so called "intelligence explosion". After that, AI's would be able to create more advanced versions of themselves (without any human involvement) - until eventually we are living inside an essentially virtual reality.