Explaining the equity premium puzzle using myopic loss aversion

Line Isager-Larsen

Student thesis: Master thesis


This thesis presents an attempt to resolve the well-known equity premium puzzle using insight from behavioural finance – namely prospect theory and the concept known as myopic loss aversion. The notion is that the reason why economist have had such a hard time reconciling the predictions of standard expected utility theory to real world observations is that decision makers do not behave as suggested by the standard normative model. Rather a new descriptive theory is warranted since decision makers in their behaviour are observed to violate vital assumptions underlying utility maximisation

EducationsMSc in Applied Economics and Finance, (Graduate Programme) Final Thesis
Publication date2006
Number of pages96