The Loss Aversion / Narrow Framing Approach to the Equity Premium Puzzle

Nicholas Barberis and Ming Huang

No 12378, NBER Working Papers from National Bureau of Economic Research, Inc

Abstract: We review a recent approach to understanding the equity premium puzzle. The key elements of this approach are loss aversion and narrow framing, two well-known features of decision-making under risk in experimental settings. In equilibrium, models that incorporate these ideas can generate a large equity premium and a low and stable risk-free rate, even when consumption growth is smooth and only weakly correlated with the stock market. Moreover, they can do so for parameter values that correspond to sensible attitudes to independent monetary gambles. We conclude by suggesting some possible directions for future research.

JEL-codes: G11 G12 (search for similar items in EconPapers)
Date: 2006-07
New Economics Papers: this item is included in nep-fin, nep-fmk and nep-upt
Note: AP
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (22)

Published as Mehra, R. (ed.) Handbook of the Equity Risk Premium. Elsevier Science, 2008.

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