How speculation can explain the equity premium
نویسنده
چکیده
When measured over decades in countries that have been relatively stable, returns from stocks have been substantially better than returns from bonds. This is often attributed to investors’ risk aversion: stocks are thought to be riskier than bonds, and so investors will pay less for an expected return from stocks than for the same expected return from bonds. The game-theoretic probability-free theory of finance advanced in our 2001 book Probability and Finance: It’s Only a Game suggests an alternative explanation, which attributes the equity premium to speculation. This gametheoretic explanation does better than the explanation from risk aversion in accounting for the magnitude of the premium.
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