Jan Krause (Kiel Institute, RA “Social and Behavioral Approaches to Global Problems”; Christian Albrecht University Kiel)
This paper proposes a novel behavioral explanation for the equity premium puzzle which is based on the assumption that individuals discount future losses less than future gains. We provide experimental evidence for our hypothesis: First, we show that the discount rate for losses is smaller than for gains. Second, we show that mixed lotteries become less attractive over time and this effect is not driven via changes in risk attitudes. Given our first finding, differential discounting is a plausible explanation and therefore might be the source of an additional premium on stocks beyond the level of investor risk aversion.
Jan Krause (Kiel Institute; Christian Albrecht University Kiel), Patrick Ring (ARAG), Ulrich Schmidt (Kiel Institute; Christian Albrecht University Kiel; University of Johannesburg)