TY  - JOUR
AU  - Barberis,Nicholas
AU  - Huang,Ming
TI  - The Loss Aversion / Narrow Framing Approach to the Equity Premium Puzzle
JF  - National Bureau of Economic Research Working Paper Series
VL  - No. 12378
PY  - 2006
Y2  - July 2006
UR  - http://www.nber.org/papers/w12378
L1  - http://www.nber.org/papers/w12378.pdf
N1  - Author contact info:
Nicholas C. Barberis
Yale School of Management
135 Prospect Street
P O Box 208200
New Haven, CT 06520-8200
Tel: 203/436-0777
Fax: 203/432-6970
E-Mail: nick.barberis@yale.edu

Ming Huang
Johnson Graduate School of Management
319 Sage Hall
Cornell University
Ithaca, NY 14853
Tel: 607/255-9594
E-Mail: mh375@cornell.edu
AB  - 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.
ER  -