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DefinitionEdit

  • Equities pay a high rate of return
  • Bonds pay a lower rate of return
  • If there is sufficient explanation in the current literature to resolve these two differences, it at least does not explain the magnitude of the difference.

ExpositionEdit

  • Equities command a higher rate of return, something like 7%
  • Bonds command a lower rate of return, something like 1%
  • 6% seems impossibly high to compensate for the increased level of risk between the “minimum-risk asset” and the “efficient bundle.”
  • Bonds – why the heck are people so willing to delay consumption for such a lousy bond return?

Possible reasons:Edit

  • 1) Loss Adversion
  • 2) Loss concentrated / segmentation – poor people who aren’t able to afford stock markets push down the bond prices below what they would normally be, this increases the differential.
  • 3) Habit Formation – people prefer a steady stream of consumption
  • 4) Fat Tail ; peso-problem; disaster; (people have idiosyncratic expectations, when an disaster happens they begin to believe that it is actually more likely to happen again);
  • 5) Vanishing It simply isn’t there anymore -- currently the problem is smaller than it historically was.
  • 6) Survivor bias

SourcesEdit

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