Handbook of the Equity Risk Premium

CHAPTER 6 The Loss Aversion/Narrow Framing Approach to the Equity Premium Puzzle

Nicholas Barberis, Ming Huang

Yale University and Cornell University/SUFE

1. Introduction

2. Loss Aversion and Narrow Framing

3. The Equity Premium

3.1. Modeling Loss Aversion and Narrow Framing

3.2. Quantitative Implications

3.3. Attitudes to Large Monetary Gambles

3.4. Attitudes to Small Monetary Gambles

3.5. The Importance of Narrow Framing

4. Other Applications

5. Further Extensions

5.1. Dynamic Aspects of Loss Aversion

5.2. Other Forms of Narrow Framing

6. Conclusion and Future Directions

References

Abstract We review a recent approach to understanding the equity premium puzzle. The key elements of this approach are loss aversion and narrow framing, two ...