Talk:Equity premium puzzle

message: I was the one that changed the current article in the Wikipedia for the “Equity Premium Puzzle”. The reason I did was because I thought the current version was very imprecise, incomplete, and in many statements plain wrong. I thought most people would benefit from a more complete and detailed version.
For example, in the first line of the current article it says:
“The equity premium puzzle refers to the phenomenon that observed average annual returns on stocks over the past century are higher, by approximately 6 percentage points, than returns on government bonds.”
This statement make very little sense. The fact that the historical equity premium is about 6% does not constitute a puzzle per se. The puzzle comes from the fact that standard neoclassical growth theory can not replicate such a large historical equity premium. This point is layout very clearly in the version I proposed and placed in wikipedia.
Furthermore, contrary to what is stated in the wikipedia article, the puzzle says nothing about the existence of arbitrage opportunities. In fact this is a very common misinterpretation of the puzzle. Arbitrages are investment opportunities with zero initial cost that lead to positive profit with no risk in the near future. The fact that the equity premium is so large could well be a reflection of risks that we economist do not know how to model and quantify yet.
Another incomplete and poor statement was:
“A large number of explanations for the puzzle have been proposed. These include a contention that the puzzle is a statistical illusion, modifications to the assumed preferences of investors and imperfections.”
Which studies state that the puzzle is a statistical illusion? What does the writer mean by imperfections?
Also emphasizing Benartzi and Thaler (1995) as the main solution to the puzzle is very bias and incorrect. There are several studies with insightful and interesting solutions for the puzzle, written in the last 20 years! I don’t think the wikipedia article should bias towards one solution over all others. In the version I proposed, a large number of solutions are pointed out.
I have read the original article of Mehra and Prescott and even replicated most of their results. Plus have also read Shiller’s articles. In fact, Shiller is known for a different puzzle called the volatility puzzle. It would be incorrect to attribute Shiller’s work to the equity premium puzzle.
I suggest we incorporate into the new article I proposed, some of the things you found interesting from the initial version. I think many students of economics and finance would benefit from a more complete, detailed, and correct version of the equity premium puzzle.
Hope you find this helpful. I will think about a new version, but please let me know your thoughts first.
:There was no doubt things you could incorporate. A better way to do that would probably be to build off the existing article, though, deleting where necessary and expanding where appropriate. The trouble with what you had in was that it looked and read like an essay and it deleted quite a bit of the useful information which is here now. But edit away, this isn't perfect by any means. Much of the info here was based off the thaler article because that's what I had studied at the time, not because I had any particular barrel to push. I'm sorry I can't be of much more help, it's been too long since I did this stuff and I no longer have my material. The thaler article might have references for things like the claims it was a statistical illusion, though, if you want to scan it (that might have been another article, though, I can't remember). 
:Also, I believe the article does mention arbitrage... the sentence after the one you quoted is "Economists expect arbitrage opportunities would reduce the difference between returns on these two investment opportunities to reflect the risk premium investors demand when investing in relatively more risky stocks." and I think the nature of the puzzle (in line with what you said) is explained reasonably well if you read the full first para (eg. "That is, economists predict the difference in returns between these two investments should be much smaller than 6 percentage points" and the statistical example). Psychobabble 10:05, 11 September 2006 (UTC)
replies: text: I agree that the current article does not even do justice to the subject of the equity premium. There have been hundreds of papers on the topic (The original article has over 1000 citations), and citing just 2 papers as possible explanations sheds poor light on the puzzle. I would rather that no explanations be offered - and the reader instead be referred to the review articles. I believe that the article needs to be reworked quite a bit. —The preceding unsigned comment was added by 131.215.220.112 (talk) 18:29, 24 January 2007 (UTC)
thread_title:  New Article 

message: I totally couldn't understand this! There's a premium for equities because they're more risky, okay, got that, so what's the puzzle? Here's hoping that one day someone who knows economics and can write will find this page!
:I agree only a wild risk seeker would prefer 0/100,000 to 51,209. I imagine a lot of people would prefer $48,791 to 50% chance of $0/$100,000. That is what you would expect. I think the question is actually 50,000/100,000 vs 51,209 and I have changed it back to that. However, I suggest there is missing information: the risk premium of 6% is an annual 6% so the information required is the time period. crandles 14:26, 10 September 2005 (UTC)
replies: text: The article which this example is taken from (Benatzi and Thaler) explain how this is derived. And yes, it is (as initially written) an implication of indifference between  a bet with a 50% chance of $50,000 or $100,000 and a certain payoff of $51,209 which is a crazy high level of risk aversion.Psychobabble 22:07, 26 November 2005 (UTC)
thread_title:  . 

message: Can someone supply a reference for the quantitative risk adversion implication (the 100% of 51k vs 50% of 50k/50% of 100k) example.  I think it is important to demonstrate how this figures was arrived at and assumptions behind it.  o/w it just seems like a number out of thin air.  novacatz 04:07, 25 November 2005 (UTC)
replies: text: I wrote that part of the article and the reference is the Benartzi and Thaler artic/le in the references section. Is it necessary to footnote an article which is in the references section? Psychobabble 22:02, 26 November 2005 (UTC)
replies: text:  I think in this case it would be handy, for instance -- I wanted to dig up the working behind that calc. and sure the ref is there (one among four) -- it would be nice to know directly which reference to look at. novacatz 13:36, 5 December 2005 (UTC)
thread_title:  Please provide Reference 

message: It seems that Shiller might be the first in this arena, not the authors cited?
Here is a fragment: Long before he became famous for his book Irrational Exuberance, Shiller developed his thinking on this subject in a series of studies published in academic journals, most notably with an article entitled Do stock prices move too much to be justified by subsequent changes in dividends?, published in the American Economic Review in 1981.
:There is a link to excess volatility, which I'll try to spell out in a revision, but the equity premium is a distinct phenomenon.JQ 01:52, 29 August 2006 (UTC)
thread_title: Wiki Article on Shiller

message: A change a while back replaced the entire article as it stood with an essay that was in fairly poor shape, and had attracted a cleanup notice. I took a quick look and decided that it would be better to go back to the previous version, then incorporate anything worthwhile from the new one. I'll try to tackle this before too long.JQ 01:50, 29 August 2006 (UTC)
replies: text: Gotcha. It did look like someone had simply cut-pasted their uni economics essay onto the page. Psychobabble 01:49, 29 August 2006 (UTC)
thread_title: Reverted complete replacement of article

message: The section on possible explanations
* was written by several different people over a period of several months;
* cites reliable sources;
* is mostly understandable, at least to me, a person with no training in business whatsoever.
It might not be perfect—few pages in WP are—but it's certainly not original research. If you have a problem with it, either improve it yourself or state your complaint here, rather than just deleting the whole section. (Why do I have to explain things like this to an admin?) --Zvika 07:06, 9 October 2007 (UTC)
replies: text: I've had a first go at a rewrite, first cut only.JQ 12:23, 9 October 2007 (UTC)
replies: text: JQ, I like your edits. I do think that self-citing is against Wikipedia guidelines, and in general frowned upon. There are any number of works that cover this topic, and I think it would be unfair to the literature to just cite one paper. This is precisely why I separated the entries. Could you please remove the self-citations ? Therealgandalf 22:25, 9 October 2007 (UTC)
replies: text: As regards the guidelines and self-citation, WP:COS says this is OK. I've drawn from my paper because it's a survey to which I (unsurprisingly) know well and have easy access to. But it would be good to have more from Kocherlakota and Mehra, and I'll try to add some when i get a chance.JQ 22:44, 9 October 2007 (UTC)
thread_title:  Possible explanations 

message: Admittedly, I am not familiar with the paper cited in this section. Nevertheless, it seems that these are not direct implications of the equity premium and/or high risk aversion and that they must rest on additional assumptions. For instance, the benchmark model of the firm would involve managers maximizing shareholder value. Managers acting myopically would rest on what is assumed about managerial compensation. This doesn't seem to have much to do with the equity premium puzzle. I question whether this section warrants inclusion in the article. If an editor feels it does, perhaps he could better illustrate how the equity premium puzzle is connected to these implications.
Wik-e-wik (talk) 23:47, 29 April 2008 (UTC)
replies: text: I've reverted. If you wish to pursue this line, quote the policy under which recent (published and peer-reviewed) research doesn't belong in Wikipedia. You are correct in saying that the implications of the equity premium differ, depending on the explanation. Maybe rather than blanking material, you could edit to include this point. JQ (talk) 04:20, 9 May 2008 (UTC)
replies: text: I have no problem with relevant peer reviewed recent research being included in wikipedia and in fact find it one of wikipedia's strengths. My issue is with the relevancy of the information contained in this section. My main point is that this is a list of implications two authors deduced from certain explanations of the existence of an equity premium. Since the implications follow from explanations rather than the puzzle itself this section seems tangential to me. I have no interest in getting involved in an edit war and as such won't redelete this section. However, I would urge you to follow the guidelines in WP:COI and yield to the consensus view when citing your own work.Wik-e-wik (talk) 20:04, 9 May 2008 (UTC)
thread_title:  Implications 

message: Given the recent collapse in equity prices, how have the significantly reduced implied annual gains affected this puzzle? It seems it should not apply as much anymore.  —Preceding unsigned comment added by 24.6.250.201 (talk) 22:22, 20 November 2008 (UTC)
thread_title:  Current Market Prices 

message: The article is a headache, People, please don't make it so complicated that after reading it for 5 minutes, I still don't get the point. In one sentence
:equity premium puzzle is one that equity premium is too high, risk free rate puzzle is one that the risk free rate is too low. 
Am I right?  Jackzhp (talk) 15:20, 21 August 2010 (UTC)
thread_title: Simple explanation

message: Note that the article mentions the geometric mean. However, it is generally accepted today that the right mean to consider is the significantly higher arithmetic mean as it represents much better what to expect from the coming year. No time to actually edit and find suitable source, but someone should update this...  — Preceding unsigned comment added by 188.60.248.208 (talk) 06:39, 8 January 2014 (UTC)
thread_title:  Geometric vs arithmetic mean 

message: Dr. Jaccard has reviewed this Wikipedia page, and provided us with the following comments to improve its quality:
We hope Wikipedians on this talk page can take advantage of these comments and improve the quality of the article accordingly.
We believe Dr. Jaccard has expertise on the topic of this article, since he has published relevant scholarly research:
*Reference : Christoffel, Kai & Jaccard, Ivan & Kilponen, Juha, 2011. "Government bond risk premia and the cyclicality of fiscal policy," Working Paper Series 1411, European Central Bank.
ExpertIdeasBot (talk) 19:01, 26 July 2016 (UTC)
thread_title:  Dr. Jaccard's comment on this article 

message: Could we please unlock this article for free editing. The article is still in a very bad shape and is presently stuck in a misleading state.
The moderators want us to discuss the contribution by FNAS (https://en.wikipedia.org/wiki/User_talk:FNAS) which was repeatedly deleted by some people.
Personally, I am very supportive of alternative explanations of the equity premium. However, I can also see why the people push back on FNAS's contribution.
First of all, the current edition of FNAS's book ("Capitalism: Competition, Conflict, Crises") does not discuss the Equity Premium Puzzle. FNAS has to make his argument before pretending to summarize it on Wikipedia.
I strongly suggest FNAS to present his argument for a proper scientific review. Let me also add that Wikipedia is not a place for proposing new arguments - FNAS needs to write a proper scientific paper discussing the actual subject of the equity premium puzzle and only then, maybe, report a summary of his findings on Wikipedia.
All I see right now is FNAS marketing his book as #1 solution of the puzzle while not even discussing the puzzle explicitly. This is not just unprofessional, it is morally questionable. It goes against the spirit of Wikipedia. It is embarrassing to see a grown person to put his ambitions above the community in such a blunt way. Given FNAS's previous suspensions for edit wars on Wikipedia, I suggest to revert his edits and give him another suspension.
In summary, FNAS does not have an argument. He needs to write a scientific paper explaining the observed equity premia in detail. Before this happens he should not be allowed to use Wikipedia to promote the sales of his book.  — Preceding unsigned comment added by 219.78.95.91 (talk) 08:20, 18 June 2018 (UTC)
replies: text: It's not "my book", and you obviously didn't bother to read the cited pages. I'd love to enter into a discussion, but not one based on false accusations and assumptions. FNAS (talk) 11:33, 18 June 2018 (UTC)
thread_title:  Please unlock this article  

message: FNAS, you cannot just state that the performance of equities and bonds "equalize" to different values because "there is no mechanism that equalizes equity and bond rates of return".
The contemporaries of Aristotle would be very impressed. However, in the 21st century we do not longer find that kind of argument convincing. If we did we would still be talking about stones going down to "equalize" with the Earth and flames going up to "equalize" with the heavens.
I agree with the above comments that you need to write a paper. Right now there is indeed nothing to discuss. If you believe in what you are saying you will enjoy writing it up properly. So, don't be lazy.
BTW, I am not demanding you publish in a "respectable journal". At the moment the subject of economics is corrupt to the core with "respectable" journals promoting "respectable" people. Unless you have the right connections you will not succeed in publishing (not in the top 10 journals anyhow).
Nevertheless, there is no better way than summarizing an argument in a paper. Conversely, there is no worse way than blocking a open resource such as Wikipedia with a silly edit war. Don't lower yourself to the level of top economists and unblock wikipedia.
I also agree that the current wiki-page is very badly written. Pretty clearly people are using it for self-promotions at the expense of the topic. This is why it is so patchy and has no overarching logic.  — Preceding unsigned comment added by 178.120.5.36 (talk) 19:26, 10 July 2018 (UTC)
thread_title: =

message: I've unprotected the article, as the concerns of the IP editor have now been detailed on the talk page, which was the intention of the semiprotection.  I have no understanding at all of economic theory so am not the best person to try and guide this discussion.  There are accusations of conflicts of interest, the merits of which I am not able to determine.  However there are clearly some issues with the article, given the contribution just above from ExpertIdeasBot.
I will leave a note at Wikipedia talk:WikiProject Economics asking if someone could help out. Fish+Karate 09:03, 26 July 2018 (UTC)
thread_title: Unprotected

message: I removed this confusing graph  as it addresses nothing about the relationship between risk aversion and excess return. Normchou 💬 21:53, 4 November 2021 (UTC)
thread_title:  Confusing graph removed