Talk:Equity premium puzzle

New Article
I was the one that changed the current article in the Wikipedia for the “Equity Premium Puzzle”. The reason I did was because I thought the current version was very imprecise, incomplete, and in many statements plain wrong. I thought most people would benefit from a more complete and detailed version.

For example, in the first line of the current article it says:

“The equity premium puzzle refers to the phenomenon that observed average annual returns on stocks over the past century are higher, by approximately 6 percentage points, than returns on government bonds.”

This statement make very little sense. The fact that the historical equity premium is about 6% does not constitute a puzzle per se. The puzzle comes from the fact that standard neoclassical growth theory can not replicate such a large historical equity premium. This point is layout very clearly in the version I proposed and placed in wikipedia.

Furthermore, contrary to what is stated in the wikipedia article, the puzzle says nothing about the existence of arbitrage opportunities. In fact this is a very common misinterpretation of the puzzle. Arbitrages are investment opportunities with zero initial cost that lead to positive profit with no risk in the near future. The fact that the equity premium is so large could well be a reflection of risks that we economist do not know how to model and quantify yet.

Another incomplete and poor statement was:

“A large number of explanations for the puzzle have been proposed. These include a contention that the puzzle is a statistical illusion, modifications to the assumed preferences of investors and imperfections.”

Which studies state that the puzzle is a statistical illusion? What does the writer mean by imperfections?

Also emphasizing Benartzi and Thaler (1995) as the main solution to the puzzle is very bias and incorrect. There are several studies with insightful and interesting solutions for the puzzle, written in the last 20 years! I don’t think the wikipedia article should bias towards one solution over all others. In the version I proposed, a large number of solutions are pointed out.

I have read the original article of Mehra and Prescott and even replicated most of their results. Plus have also read Shiller’s articles. In fact, Shiller is known for a different puzzle called the volatility puzzle. It would be incorrect to attribute Shiller’s work to the equity premium puzzle.

I suggest we incorporate into the new article I proposed, some of the things you found interesting from the initial version. I think many students of economics and finance would benefit from a more complete, detailed, and correct version of the equity premium puzzle.

Hope you find this helpful. I will think about a new version, but please let me know your thoughts first.


 * There was no doubt things you could incorporate. A better way to do that would probably be to build off the existing article, though, deleting where necessary and expanding where appropriate. The trouble with what you had in was that it looked and read like an essay and it deleted quite a bit of the useful information which is here now. But edit away, this isn't perfect by any means. Much of the info here was based off the thaler article because that's what I had studied at the time, not because I had any particular barrel to push. I'm sorry I can't be of much more help, it's been too long since I did this stuff and I no longer have my material. The thaler article might have references for things like the claims it was a statistical illusion, though, if you want to scan it (that might have been another article, though, I can't remember).


 * Also, I believe the article does mention arbitrage... the sentence after the one you quoted is "Economists expect arbitrage opportunities would reduce the difference between returns on these two investment opportunities to reflect the risk premium investors demand when investing in relatively more risky stocks." and I think the nature of the puzzle (in line with what you said) is explained reasonably well if you read the full first para (eg. "That is, economists predict the difference in returns between these two investments should be much smaller than 6 percentage points" and the statistical example). Psychobabble 10:05, 11 September 2006 (UTC)


 * I agree that the current article does not even do justice to the subject of the equity premium. There have been hundreds of papers on the topic (The original article has over 1000 citations), and citing just 2 papers as possible explanations sheds poor light on the puzzle. I would rather that no explanations be offered - and the reader instead be referred to the review articles. I believe that the article needs to be reworked quite a bit. —The preceding unsigned comment was added by 131.215.220.112 (talk) 18:29, 24 January 2007 (UTC).

.
I totally couldn't understand this! There's a premium for equities because they're more risky, okay, got that, so what's the puzzle? Here's hoping that one day someone who knows economics and can write will find this page!


 * I agree only a wild risk seeker would prefer 0/100,000 to 51,209. I imagine a lot of people would prefer $48,791 to 50% chance of $0/$100,000. That is what you would expect. I think the question is actually 50,000/100,000 vs 51,209 and I have changed it back to that. However, I suggest there is missing information: the risk premium of 6% is an annual 6% so the information required is the time period. crandles 14:26, 10 September 2005 (UTC)
 * The article which this example is taken from (Benatzi and Thaler) explain how this is derived. And yes, it is (as initially written) an implication of indifference between a bet with a 50% chance of $50,000 or $100,000 and a certain payoff of $51,209 which is a crazy high level of risk aversion.Psychobabble 22:07, 26 November 2005 (UTC)

Answer: I'd propose you have a look at the original paper. There is no doubt that most people are risk averse. If they are risk averse, it means they want to be compensated for taking risks. Hence, market prices of risky assets (assumed to be shares) must be such that expected payoffs are higher than with risk-free assets (assumed to be interest bearing papers).

The question is, how big is risk aversion. Mehra and Prescott looked at standard risk aversion as implied from other research (sorry, don't have the paper in front of me, so no details can be provided here). With this level of risk aversion and the risk of shares, it is implied that shares would only pay of 0.35% more than treasury bills. The puzzle is that premium was found to be 6.18%, so people seem to be way more risk averse with respect to shares than in other circumstances.

Hope this helps.

Please provide Reference
Can someone supply a reference for the quantitative risk adversion implication (the 100% of 51k vs 50% of 50k/50% of 100k) example. I think it is important to demonstrate how this figures was arrived at and assumptions behind it. o/w it just seems like a number out of thin air. novacatz 04:07, 25 November 2005 (UTC)
 * I wrote that part of the article and the reference is the Benartzi and Thaler artic/le in the references section. Is it necessary to footnote an article which is in the references section? Psychobabble 22:02, 26 November 2005 (UTC)
 * I think in this case it would be handy, for instance -- I wanted to dig up the working behind that calc. and sure the ref is there (one among four) -- it would be nice to know directly which reference to look at. novacatz 13:36, 5 December 2005 (UTC)

Wiki Article on Shiller
It seems that Shiller might be the first in this arena, not the authors cited? Here is a fragment: Long before he became famous for his book Irrational Exuberance, Shiller developed his thinking on this subject in a series of studies published in academic journals, most notably with an article entitled Do stock prices move too much to be justified by subsequent changes in dividends?, published in the American Economic Review in 1981.


 * There is a link to excess volatility, which I'll try to spell out in a revision, but the equity premium is a distinct phenomenon.JQ 01:52, 29 August 2006 (UTC)

Reverted complete replacement of article
A change a while back replaced the entire article as it stood with an essay that was in fairly poor shape, and had attracted a cleanup notice. I took a quick look and decided that it would be better to go back to the previous version, then incorporate anything worthwhile from the new one. I'll try to tackle this before too long.JQ 01:50, 29 August 2006 (UTC)


 * Gotcha. It did look like someone had simply cut-pasted their uni economics essay onto the page. Psychobabble 01:49, 29 August 2006 (UTC)

With all due respect...
Although the replacement article was in poor style for an encyclopedia entry, it does have certain advantages over the current version. First, I think it is remarkable that the current article does not so much as mention Mehra and Prescott in the body of the article. This was the spur for all subsequent research, it absolutely should be prominently placed. Second, the list of articles at the end of the replacement article makes a much better account of the attempts to explain the epp than the current article, which mentions only Benartzi and Thaler and the Ben-Haim book. If someone came to this article without knowing much about the epp, they'd leave believing these to be the only two attempted explanations. That's a plain awful summary of the research in this area over the last 20 years or so.

Also, the contribution about the Ben-Haim explanation (by Mr Ben-Haim himself?) is in terrible style. "We model this behavior..."? This is not a working paper.

Jackie hayes 05:39, 31 October 2006 (UTC)


 * I'm pretty sure some of this was in earlier versions. I've put (back) a reference to Mehra and Prescott, and will try and do some more when I get time. I agree that the Ben-Haim stuff needs work, and to be put in the context of the many proposed explanations.JQ 09:01, 31 October 2006 (UTC)


 * There are way too many explanations that try to resolve the equity premium, neither of them being successful. The original Mehra-Prescott paper has about 1500 citations now. There are several approaches - habit formation, alternative preferences, survivor bias etc. Moreover, the puzzle is not so much about the equity premium per se, but the fact that the implied risk-free rate by the model is so high that the equity premium predicted by the model is too small. Recent work focuses on non-representative agent models such as overlapping generation models, with constraints on borrowing, bequest motivations etc.


 * I suggest just cleaning up the entry to explain just the puzzle, and leave out all the explanations. The possible explanations can be a separate wikipedia entry - perhaps several entries. Therealgandalf 22:28, 8 October 2007 (UTC)


 * I think this move is at best, premature, and have reversed it. At the moment it just produces two stubby and unsatisfactory articles. If the article becomes so long that the explanations section is unmanageable, it might be appropriate. But, as you say, we need to improve the description of the puzzle as well as the explanations.JQ 22:55, 8 October 2007 (UTC)

Possible explanations
The section on possible explanations It might not be perfect—few pages in WP are—but it's certainly not original research. If you have a problem with it, either improve it yourself or state your complaint here, rather than just deleting the whole section. (Why do I have to explain things like this to an admin?) --Zvika 07:06, 9 October 2007 (UTC)
 * was written by several different people over a period of several months;
 * cites reliable sources;
 * is mostly understandable, at least to me, a person with no training in business whatsoever.


 * I've had a first go at a rewrite, first cut only.JQ 12:23, 9 October 2007 (UTC)


 * JQ, I like your edits. I do think that self-citing is against Wikipedia guidelines, and in general frowned upon. There are any number of works that cover this topic, and I think it would be unfair to the literature to just cite one paper. This is precisely why I separated the entries. Could you please remove the self-citations ? Therealgandalf 22:25, 9 October 2007 (UTC)


 * As regards the guidelines and self-citation, WP:COS says this is OK. I've drawn from my paper because it's a survey to which I (unsurprisingly) know well and have easy access to. But it would be good to have more from Kocherlakota and Mehra, and I'll try to add some when i get a chance.JQ 22:44, 9 October 2007 (UTC)

My working understanding of the process is based on the divergence of cost and income, the average performance of a company may be found to run the National average GDP growth +/- and by extention globally, individual corporate growth may be found to be a microcosim of the theory.

The result obviously suggests that not much has been done to improve investor perception of risk in the equities market, one thing is clear, positive fundamental performance will continue to attract intrest, as to whether we can measure the emotions of investors, now that's another thing... —Preceding unsigned comment added by Lloydastewart (talk • contribs) 20:20, 21 February 2008 (UTC)

Positive and negative pressures at play as demand and supply are finite, should the theory be true I will name it". —Preceding unsigned comment added by 72.252.36.120 (talk) 17:30, 19 February 2008 (UTC)

Implications
Admittedly, I am not familiar with the paper cited in this section. Nevertheless, it seems that these are not direct implications of the equity premium and/or high risk aversion and that they must rest on additional assumptions. For instance, the benchmark model of the firm would involve managers maximizing shareholder value. Managers acting myopically would rest on what is assumed about managerial compensation. This doesn't seem to have much to do with the equity premium puzzle. I question whether this section warrants inclusion in the article. If an editor feels it does, perhaps he could better illustrate how the equity premium puzzle is connected to these implications. Wik-e-wik (talk) 23:47, 29 April 2008 (UTC)

I have now read the article. It speculates on the implications various explanations of the equity premium puzzle might have for policy issues. As I suspected, the implications are not implied by the existence of the equity premium puzzle, but rather by various explanations of the puzzle. In my opinion this is recent research that does not belong in an encyclopedic article. I'm removing this section and the reference the paper. Wik-e-wik (talk) 00:56, 9 May 2008 (UTC)


 * I've reverted. If you wish to pursue this line, quote the policy under which recent (published and peer-reviewed) research doesn't belong in Wikipedia. You are correct in saying that the implications of the equity premium differ, depending on the explanation. Maybe rather than blanking material, you could edit to include this point. JQ (talk) 04:20, 9 May 2008 (UTC)


 * I have no problem with relevant peer reviewed recent research being included in wikipedia and in fact find it one of wikipedia's strengths. My issue is with the relevancy of the information contained in this section. My main point is that this is a list of implications two authors deduced from certain explanations of the existence of an equity premium. Since the implications follow from explanations rather than the puzzle itself this section seems tangential to me. I have no interest in getting involved in an edit war and as such won't redelete this section. However, I would urge you to follow the guidelines in WP:COI and yield to the consensus view when citing your own work.Wik-e-wik (talk) 20:04, 9 May 2008 (UTC)

Current Market Prices
Given the recent collapse in equity prices, how have the significantly reduced implied annual gains affected this puzzle? It seems it should not apply as much anymore. —Preceding unsigned comment added by 24.6.250.201 (talk) 22:22, 20 November 2008 (UTC)

Mehra has published a handbook on the risk premium which is exceedingly thorough and provides a balanced context from which to analyze the puzzle. Please note that by their own admission (the original authors), the stated goal was to derive the market premium for the CAPM from economic fundamentals. The market premium had been estimated based on historical or heuristic methods.

Much of the problem with the "solutions" is they are not normative, in that one is expected to believe the average consumer estimates consumption-savings ratios from descriptive models that are difficult to calculate. The current technology by Mehra's comments is to assume institutional constraints account for most of the unexplained premium.

The introduction of TIPS serves to validate those who found the risk-free rate in the Mehra-Prescott data set too low to be comparable with average market returns for the average consumer.

My personal research looks for a simple, non-institutional explanation for relatively high rates of return in concert with low consumption growth rates, which I found, as the TIPS data seems to explain the relatively low average real risk-free rate of return. After conversing with Mehra, I sought explanations for the seemingly high volatility of the market return. This is a problem from a macro viewpoint, as consumption expectations are rather smooth and constitute a considerable portion of income (revenues), so where is the volatility coming from? Increasing financial leverage for a century? Government or net exports so volatile as to overwhelm consumption, which is a dominant national income and product account?

I found a simple explanation, in part from my contact with Investment Bankers. Dividend discount models (or more generally Gordon growth models) are in practice pro-cyclical, so evaluations tend to be optimistic or pessimistic. My argument for volatility is that a major stock price indice that is generated by a macroeconomist would not reflect the observed volatity, even when accounting for the signficant portion of revenues that are generated by exports for the S&P 500. —Preceding unsigned comment added by 75.207.136.13 (talk) 16:32, 23 March 2010 (UTC)

Simple explanation
The article is a headache, People, please don't make it so complicated that after reading it for 5 minutes, I still don't get the point. In one sentence
 * equity premium puzzle is one that equity premium is too high, risk free rate puzzle is one that the risk free rate is too low.

Am I right? Jackzhp (talk) 15:20, 21 August 2010 (UTC)

The puzzle is reconciling low interest rates and high equity premia with consumption growth, using time-separable utility with positive rate of impatience. In Merton/Breeden's diffusion models:

interest rate =  impatience + relative_risk_aversion*E[consumption growth] - relative_risk_aversion*(relative_risk_aversion+1)/2*Variance[consumption growth],

equity premium =  relative_risk_aversion*variance[consumption growth].

Mehra and Prescott [1985, Figure 4] cannot match interest rate = .8%, equity premium = 6.18%, E[consumption growth] = 1.8%, and Variance[consumption growth] = 3.6%^2 using relative_risk_aversion 0.

The current conventional explanation is Epstein-Zin recursive preferences. This page should be edited by people who understand the role of consumption in Mehra and Prescott's paper. 66.44.118.142 (talk) 21:22, 29 December 2016 (UTC)

Geometric vs arithmetic mean
Note that the article mentions the geometric mean. However, it is generally accepted today that the right mean to consider is the significantly higher arithmetic mean as it represents much better what to expect from the coming year. No time to actually edit and find suitable source, but someone should update this... — Preceding unsigned comment added by 188.60.248.208 (talk) 06:39, 8 January 2014 (UTC)

Dr. Jaccard's comment on this article
Dr. Jaccard has reviewed this Wikipedia page, and provided us with the following comments to improve its quality:

"Many important contributions to this literature are missing."

We hope Wikipedians on this talk page can take advantage of these comments and improve the quality of the article accordingly.

We believe Dr. Jaccard has expertise on the topic of this article, since he has published relevant scholarly research:


 * Reference : Christoffel, Kai & Jaccard, Ivan & Kilponen, Juha, 2011. "Government bond risk premia and the cyclicality of fiscal policy," Working Paper Series 1411, European Central Bank.

ExpertIdeasBot (talk) 19:01, 26 July 2016 (UTC)

Please unlock this article
Could we please unlock this article for free editing. The article is still in a very bad shape and is presently stuck in a misleading state.

The moderators want us to discuss the contribution by FNAS (https://en.wikipedia.org/wiki/User_talk:FNAS) which was repeatedly deleted by some people.

Personally, I am very supportive of alternative explanations of the equity premium. However, I can also see why the people push back on FNAS's contribution.

First of all, the current edition of FNAS's book ("Capitalism: Competition, Conflict, Crises") does not discuss the Equity Premium Puzzle. FNAS has to make his argument before pretending to summarize it on Wikipedia.

I strongly suggest FNAS to present his argument for a proper scientific review. Let me also add that Wikipedia is not a place for proposing new arguments - FNAS needs to write a proper scientific paper discussing the actual subject of the equity premium puzzle and only then, maybe, report a summary of his findings on Wikipedia.

All I see right now is FNAS marketing his book as #1 solution of the puzzle while not even discussing the puzzle explicitly. This is not just unprofessional, it is morally questionable. It goes against the spirit of Wikipedia. It is embarrassing to see a grown person to put his ambitions above the community in such a blunt way. Given FNAS's previous suspensions for edit wars on Wikipedia, I suggest to revert his edits and give him another suspension.

In summary, FNAS does not have an argument. He needs to write a scientific paper explaining the observed equity premia in detail. Before this happens he should not be allowed to use Wikipedia to promote the sales of his book. — Preceding unsigned comment added by 219.78.95.91 (talk) 08:20, 18 June 2018 (UTC)


 * It's not "my book", and you obviously didn't bother to read the cited pages. I'd love to enter into a discussion, but not one based on false accusations and assumptions. FNAS (talk) 11:33, 18 June 2018 (UTC)

=
FNAS, you cannot just state that the performance of equities and bonds "equalize" to different values because "there is no mechanism that equalizes equity and bond rates of return".

The contemporaries of Aristotle would be very impressed. However, in the 21st century we do not longer find that kind of argument convincing. If we did we would still be talking about stones going down to "equalize" with the Earth and flames going up to "equalize" with the heavens.

I agree with the above comments that you need to write a paper. Right now there is indeed nothing to discuss. If you believe in what you are saying you will enjoy writing it up properly. So, don't be lazy.

BTW, I am not demanding you publish in a "respectable journal". At the moment the subject of economics is corrupt to the core with "respectable" journals promoting "respectable" people. Unless you have the right connections you will not succeed in publishing (not in the top 10 journals anyhow).

Nevertheless, there is no better way than summarizing an argument in a paper. Conversely, there is no worse way than blocking a open resource such as Wikipedia with a silly edit war. Don't lower yourself to the level of top economists and unblock wikipedia.

I also agree that the current wiki-page is very badly written. Pretty clearly people are using it for self-promotions at the expense of the topic. This is why it is so patchy and has no overarching logic. — Preceding unsigned comment added by 178.120.5.36 (talk) 19:26, 10 July 2018 (UTC)

Unprotected
I've unprotected the article, as the concerns of the IP editor have now been detailed on the talk page, which was the intention of the semiprotection. I have no understanding at all of economic theory so am not the best person to try and guide this discussion. There are accusations of conflicts of interest, the merits of which I am not able to determine. However there are clearly some issues with the article, given the contribution just above from ExpertIdeasBot.

I will leave a note at Wikipedia talk:WikiProject Economics asking if someone could help out. Fish +Karate 09:03, 26 July 2018 (UTC)

Dispute over Shaikh Explanation
Okay, I've come here after seeing 's request at WP:ECON. Just so anyone coming by for the first time is clear, the dispute surrounds a lot of edits like this adding and removing a paragraph originally added by in October 2017, continuing for about the next several months. FNAS has been the main person restoring the content (plus what seem to be a few passing vandal fighters reflexively restoring the unexplained deletions). The content has been removed by several IPs. There was very little communication until recently, though at a few points FNAS asked in his/her edit summaries for more of an explanation on the talk page as to why sourced content was being removed, which never happened.

In trying to reach a consensus over this particular paragraph, my first question surrounds the labeling of this as the "classical" explanation. Since FNAS wikilinked this to Classical economics, there's no doubt that s/he intended this to refer to the school, and not a particularly ancient or conventional wisdom. But many of the comments the IPs left in their edit summaries seemed to take issue with this label in particular, and when another editor tried to tone down this claim, you reverted him, saying "This is not a belief. This is a logical consequence of the way things are modeled in modern classical economics." First, I worry that this phrasing implies a reliance more on original research than 3rd party sourcing. But more importantly, since this seems to be the phrase most in dispute, FNAS: can you provide any reliable 3rd party source that demonstrates this is indeed the widely held belief of classical economists? Or, if you cannot find any such explicit statement from an independent source, can you show some prominent classical-leaning economists who hold this view and represent it as the mainstream position? (A statement by Shaikh himself saying he believes it follows naturally from classicalist assumptions is not sufficient for this.) The simplest solution to potentially resolve the dispute seems to be to retitle the section with something like "Anwar Shaikh explanation," and remove the claim to be speaking for classical economics as a whole until a source can be found.

Second, there is the question of whether the source FNAS cites (Shaikh's Capitalism: Competition, Conflict, Crises) contains the explanation s/he summarizes here. I have not reviewed the book myself (though I see it is at a university library near me if I need to), but am inclined to give FNAS the benefit of the doubt here.

Third, there is the question of the prominence given to the explanation. First: placement. In your original series of edits in October, you moved the "denial" section to the end, thinking it did not deserve to be at the top, and then replaced it with your own section. Second: size. This explanation is about twice as long as the next-longest explanation, and also includes a large graph. Detailed explanations can often be welcome, but Wikipedia also is careful not to give undue prominence to theories that are not widely accepted by the field as a whole. Some editors above have expressed a concern that there haven't been any citations given to a peer-reviewed journal, further bringing its prominent placement and length into question. Depending on what you are able to show in regards to the first question about prominence, and whether you have any peer-reviewed journal citations, it may be appropriate to slim the section down and move it further down the article.

Note that most of the above concerns the particular way the section is represented in the article. Assuming this is a fair summary of that section of the book (which, again, I'm happy to assume for the time being), it seems appropriate to be included in some form since it's been published by a notable professor.

Finally, none of this changes the disappointment some have expressed over the article as a whole. It will always be more difficult to write a comprehensive but balanced article about the various solutions to a "puzzle" than for other articles. Though my background is in economics, this particular area is outside by domain of expertise, and I invite other specialists to beef up the survey of the literature. MarginalCost (talk) 02:26, 29 July 2018 (UTC)


 * Thank you very much for this intervention. Here's a reply to some of the points you raise.
 * Regarding the labeling as classical: I considered calling this a neo-Ricardian solution since it relies on a variant of Carlo Panico's theory of banking. But Shaikh doesn't apply that label to himself, so I went with his own label 'classical'. I didn't actually intend to claim that this is the classical/neo-Ricardian/whatever solution, which is why I wrote a classical framework rather than the classical framework, but I suppose that's not strong enough a hedge. I'd find a renaming to 'Shaikh's solution' or some such quite acceptable.
 * I moved 'Denial' to the end, because it contained no references to reliable sources. It also seemed strange to first discuss the possibility that there is no puzzle (right after the statement that there is a wealth of data to suggest there is), then go on to discussing theoretical solutions.
 * Regarding whether the book contains the claim: I think Shaikh also mentions it briefly in the video lectures accompanying the book (probably no. 11: ).
 * As for relative length, I understand what you're getting at, but I'd like to add that it'd be a tad disappointing to have to remove material just because the rest of the section is too short. I would make the graph smaller and place it next to the text if I knew how. (I have considered splitting off the banking theory as its own article for the sake of brevity, but that would require more knowledge of Panico's work than I have.)
 * FNAS (talk) 08:51, 29 July 2018 (UTC)

sorry for my delay in my response. I was waiting a bit in hopes one of the IPs who were removing the content would come comment, and it fell off my radar. With no further comments, we'll proceed as planned. I have made the following changes: On the whole, I think these changes are relatively minor and preserves the great bulk of what you added, even though they are a more and technical explanation than the other proposed solutions get. As always, Wikipedia is a work in progress (this article especially), but I hope this will at least resolve this matter. MarginalCost (talk) 00:56, 28 October 2018 (UTC)
 * I renamed the section title to "Anwar Shaikh explanation," as agreed
 * I moved it further down the page, above both the uncited sections, but below the sections with references from a peer-reviewed journal.
 * I removed the graph. Besides its size, the bigger issue is that it doesn't really have much to do with the equity premium it is being used to support a relatively minor point in the argument about the relation of interest rates in bond yields vs. bank lending. This is available in the source material, but for an encyclopedic overview just noting the relationship exists is enough to follow the argument.
 * I made some slight wording modifications to the text, the most significant of which is removing the line about central bank policy, which isn't really relevant here.

Anwar Shaikh's work is not an "explanation" of the puzzle. The puzzle arises from a neo-classical (marginalist) understanding of the world. If you reject this view of economies, you are not left with any sort of puzzle. Shaikh (or someone who believes he is offering an "explanation") is basically saying "the economy isn't marginalist with profit-maximizing firms and utility maximizing consumers, so there is no puzzle". That however is a rejection of the marginalist framework, rather than an explanation within the marginalist framework of the data we see in the real world.

The section says "Stock returns, on the other hand, are equalized with the profit rate r and there is no mechanism that equalizes equity and bond rates of return." That is not an "explanation". The obvious question a marginalist would ask is "if bond returns are too low compared to stock returns, why don't entrepreneurs/traders borrow at the bond return rate, invest in firms (either by starting new firms or buying equity of existing firms), and make the "equity premium" profits reducing the gap between bond returns and stock returns?"

To say that entrepreneurs and traders do not attempt to make the above profit is not an "explanation", but simply a rejection of marginalism. This section doesn't belong in this article. JS (talk) 12:12, 31 May 2020 (UTC)

Confusing graph removed
I removed this confusing graph as it addresses nothing about the relationship between risk aversion and excess return. Normchou  💬 21:53, 4 November 2021 (UTC)