Lottery Preferences and AI Stock Exuberance
Published:
My senior thesis analyzes equity overpricing in the AI sector through the lens of behavioral finance. I model an economy in which a representative agent has cumulative prospect theory preferences, a nonexpected utility preference that predicts a desire for lottery-like payoffs. The investor must allocate her wealth among many independent and identically distributed Normal securities and a single skewed security in small supply. The skewed security follows a more realistic asset return distribution that supports substantial skewness, which I calibrate to the returns of contemporary AI equities. As a result of so-called lottery preferences, the predicted return on the skewed security is low in equilibrium, which I compare to a CAPM benchmark to determine the predicted degree of overpricing in the AI sector.