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Anomalies: The Equity Premium Puzzle

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  • Jeremy J. Siegel
  • Richard H. Thaler

Abstract

The equity premium is the difference in returns between equities and fixed income securities, such as Treasury bills. The puzzle refers to the fact that the premium has historically been very large--about 6 percent per year--too large to be easily explained by risk aversion. The authors document the evidence for the puzzle and find that is exists in many countries, over long time periods, and does not seem to be explained by survivorship bias. They also summarize several theoretical explanations. The authors conclude that it is difficult to explain the equity premium without incorporating some kind of irrationality.

Suggested Citation

  • Jeremy J. Siegel & Richard H. Thaler, 1997. "Anomalies: The Equity Premium Puzzle," Journal of Economic Perspectives, American Economic Association, vol. 11(1), pages 191-200, Winter.
    • Handle: RePEc:aea:jecper:v:11:y:1997:i:1:p:191-200
    Note: DOI: 10.1257/jep.11.1.191
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    File URL: http://www.aeaweb.org/articles.php?doi=10.1257/jep.11.1.191
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    References listed on IDEAS

    as
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    JEL classification:

    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates

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