Equity Premium Puzzle<?xml:namespace prefix = o ns = "urn:schemas-microsoft-com:office:office" />

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An anomaly that has left academics(±³¼ö,ÇÐȸȸ¿ø) in finance and economics scratching their heads is the equity premium puzzle. According to the capital asset pricing model (CAPM), investors that hold riskier financial assets should be compensated with higher rates of returns. (For more insight, see Determining Risk And The Risk Pyramid.)

Studies have shown that over a 70-year period, stocks yield average returns that exceed government bond returns by 6-7%. Stock real returns are 10%, whereas bond real returns are 3%. However, academics believe that an equity premium of 6% is extremely large and would imply that stocks are considerably risky to hold over bonds. Conventional economic models have determined that this premium should be much lower. This lack of convergence between theoretical models and empirical results represents a
stumbling block(=Àå¾Ö¹°) for academics to explain why the equity premium is so large.

Behavioral finance's answer to the equity premium puzzle revolves around the tendency for people to have "myopic loss aversion", a situation in which investors - overly preoccupied by the negative effects of losses in comparison to an equivalent amount of gains - take a very short-term view on an investment. What happens is that investors are paying too much attention to the short-term
volatility(º¯´ö,Èֹ߼º) of their stock portfolios. While it is not uncommon for an average stock to fluctuate a few percentage points in a very short period of time, a myopic (i.e., shortsighted) investor may not react too favorably to the downside changes. Therefore, it is believed that equities must yield a high-enough premium to compensate for the investor's considerable aversion to loss. Thus, the premium is seen as an incentive for market participants to invest in stocks instead of marginally(Á¶±Ý,¾à°£) safer(¾à°£ ´õ ¾ÈÀüÇÑ) government bonds.

Conventional financial theory does not account for all situations that happen in the real world. This is not to say that conventional theory is not valuable, but rather that the addition of behavioral finance can further clarify how the financial markets work.