"Select TypeScript Version" inserts full path to tsserver.js which breaks the language service

[rbuckton]

Using the version selector for TypeScript overwrites the "typescript.tsdk" setting, replacing it with the full path to tsserver.js. Restarting VS Code then produces a warning about an invalid tsserver install.

Steps to Reproduce:

1. Open a folder with a .vscode/settings.json having a "typescript.tsdk" pointing to a folder containing a valid tsserver.js installation.
2. Use the Select TypeScript Version command to chose the version specified in settings.json:
   
3. Notice that the path is replaced with a fully qualified path to the tsserver.js file.
4. Reload VS Code (either restart, or use the Developer: Reload Window command) and see the following error:
   

VS Code shouldn't be overwriting my setting for "typescript.tsdk", or at the very least should point it to the parent folder containing tsserver.js and not the file itself.

Does this issue occur when all extensions are disabled?: Yes

VS Code version: Code - Insiders 1.49.0-insider (8e872f4, 2020-08-20T05:37:43.249Z)
OS version: Windows_NT x64 10.0.19041

System Info

Item	Value
CPUs	Intel(R) Core(TM) i7-9700 CPU @ 3.00GHz (8 x 3000)
GPU Status	2d_canvas: enabled flash_3d: enabled flash_stage3d: enabled flash_stage3d_baseline: enabled gpu_compositing: enabled multiple_raster_threads: enabled_on oop_rasterization: disabled_off opengl: enabled_on protected_video_decode: unavailable_off rasterization: enabled skia_renderer: disabled_off_ok video_decode: enabled vulkan: disabled_off webgl: enabled webgl2: enabled
Load (avg)	undefined
Memory (System)	63.85GB (40.93GB free)
Process Argv	--crash-reporter-id 99273024-ceec-4453-aefb-860cdbf17aa9
Screen Reader	no
VM	0%

Extensions (11)

Extension	Author (truncated)	Version
vscode-tsserver-debug	and	1.3.0
gitlens	eam	10.2.2
vscode-pull-request-github	Git	0.19.0
vscode-gist	ken	3.0.3
vscode-docker	ms-	1.5.0
vscode-typescript-next	ms-	4.1.20200821
vsliveshare	ms-	1.0.2666
deoptexplorer-vscode	rbu	0.0.4
grammarkdown-language	rbu	0.4.3
tsserver-live-reload	rbu	1.0.1
vscodeintellicode	Vis	1.2.10

[atsikov]

Got similar error after updating TS to 4.0.2 (don't know if it is related).
After selecting "Use workspace version", VS Code shows an error

The path <absolute path to project>/node_modules/typescript/lib/tsserver.js/tsserver.js/tsserver.js/tsserver.js/tsserver.js doesn't point to a valid tsserver install. Falling back to bundled TypeScript version.

In my case typescript folder is a symlink, as it's a rush and pnpm managed monorepo.

VS Code version: 1.48.1, 1.48.2
OS version: macOS 10.15.6

[jrieken]