An AI living in a simulated universe can be just as intelligent as one living in the real world.
It can be a very good theorem prover, sure. But without access to information about the world, it can't answer questions like "what is the CEV of humanity like" or "what's the best way I can make a lot of money" or "translate this book from English to Finnish so that a native speaker will consider it a good translation". It's narrow AI, even if it could be broad AI if it were given more information.
At the recent London meet-up someone (I'm afraid I can't remember who) suggested that one might be able to solve the Friendly AI problem by building an AI whose concerns are limited to some small geographical area, and which doesn't give two hoots about what happens outside that area. Cipergoth pointed out that this would probably result in the AI converting the rest of the universe into a factory to make its small area more awesome. In the process, he mentioned that you can make a "fun game" out of figuring out ways in which proposed utility functions for Friendly AIs can go horribly wrong. I propose that we play.
Here's the game: reply to this post with proposed utility functions, stated as formally or, at least, as accurately as you can manage; follow-up comments explain why a super-human intelligence built with that particular utility function would do things that turn out to be hideously undesirable.
There are three reasons I suggest playing this game. In descending order of importance, they are: