My answer to the equity premium puzzle(EPP) is two words: investor psychology. Bonds return less than stock for the same reason CDs return less than bonds, and the cash-value portion of whole life insurance returns less than CDs. Each product is pitched at successively less sophisticated investors.******From the point of view of the securities industry, the puzzle consists in figuring out the psychology behind the preferences of the market investors--figuring it out well enough to unlock all that money tied up in (e.g.) CDs, and get it flowing to stocks.
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