1. Behavioral Finance
Economics 437

2. Equity Premium Puzzle What is it? What explains it?
Jorion and Goetzmann

3. Mehra and Prescott 1985 90 years of data
Average “real” annual yield of S&P500 = 7%
Yield for short term debt < 1%
Not consistent with presumed level of risk aversion

4. Update in 2003 by Mehra Updates info up to 2000
Looks at UK, Japan, Germany France
Similar Results

5. Jorion & Goetzmann (2007)
Equity Premium Puzzle caused by “survivor bias”
What happens to a “global” portfolio
US equities from 1921 to 1996 had a “real” return of 4.3 %
Median return of all other countries was 0.8%

6. The End