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Doesn't "Equity premium puzzle"[0] tells us to barrow money to buy equities for infinite profits? [0] https://en.wikipedia.org/wiki/Equity_premium_puzzle https

by msoad 4y ago

Doesn't "Equity premium puzzle"[0] tells us to barrow money to buy equities for infinite profits? [0] https://en.wikipedia.org/wiki/Equity_premium_puzzle https://en.wikipedia.org/wiki/Equity_premium_puzzle

elEpHantiaSis 4y ago
I dont understand this problem. Is it saying that government bonds pay less then the free market and then asking why? Why should that NOT be the case? Governments don't do anything productive, so why should there be an equal expected return compared to the private sector? I dont understand this problem.
- guerrilla 4y ago
  > Governments don't do anything productive I don't know what you mean by this. It seems false. All states produce many goods and services, primarily security, but many others like health care and such.
  - elEpHantiaSis 4y ago
    I guess I wasn't really thinking outside my bubble, but generally around me I don't see much of the government getting involved with directly producing marketable goods. The government may equip a police force, but it doesn't produce the guns or vests or cars directly, and it doesn't liquidate its services. I mean, in general, we don't have to government do jobs that would be profitable, but rather the jobs that we believe are necessary regardless of profit. Schools don't turn any monetary gains, but we believe it's necessary for the betterment of our children. I therefore wouldn't expect the government to be turning large gains back afterwords. Feels like underperformance in that sense should be expected.
    - em500 4y ago
      The puzzle is not that the government should be as productive as the private sector. The first part of the puzzle is, given that historically equities have returned a lot more (5% to 8% annually, compounding in the long term), why is there still so much money invested in T-Bills (which is what makes their return low and enables the US gov to borrow cheaply). The classical answer is that stocks might return much more on average but are also much riskier / more volatile. Now the second part of puzzle is, that explanation only holds when investors in the aggregate are extremely risk-averse, much more so than how they are observed to behave in practice (such as in simple betting situations).
      - elEpHantiaSis 4y ago
        Thanks for clearing that up for me, that makes alot more sense as a puzzle. I wonder if it's something to do with corporate lobbying and a "if you scratch my back, I'll scratch yours" game going on. For instance "If you give me the money (buy my overpriced bonds) I can do the things that get me re-elected, and meanwhile I can look into revising that bill you wanted me to look at." Just a conspiracy theory though, I'm way too blue collar to properly understand this sorta stuff.

by msoad 4y ago

elEpHantiaSis 4y ago

I dont understand this problem. Is it saying that government bonds pay less then the free market and then asking why? Why should that NOT be the case? Governments don't do anything productive, so why should there be an equal expected return compared to the private sector? I dont understand this problem.

guerrilla 4y ago
> Governments don't do anything productive I don't know what you mean by this. It seems false. All states produce many goods and services, primarily security, but many others like health care and such.
- elEpHantiaSis 4y ago
  I guess I wasn't really thinking outside my bubble, but generally around me I don't see much of the government getting involved with directly producing marketable goods. The government may equip a police force, but it doesn't produce the guns or vests or cars directly, and it doesn't liquidate its services. I mean, in general, we don't have to government do jobs that would be profitable, but rather the jobs that we believe are necessary regardless of profit. Schools don't turn any monetary gains, but we believe it's necessary for the betterment of our children. I therefore wouldn't expect the government to be turning large gains back afterwords. Feels like underperformance in that sense should be expected.
  - em500 4y ago
    The puzzle is not that the government should be as productive as the private sector. The first part of the puzzle is, given that historically equities have returned a lot more (5% to 8% annually, compounding in the long term), why is there still so much money invested in T-Bills (which is what makes their return low and enables the US gov to borrow cheaply). The classical answer is that stocks might return much more on average but are also much riskier / more volatile. Now the second part of puzzle is, that explanation only holds when investors in the aggregate are extremely risk-averse, much more so than how they are observed to behave in practice (such as in simple betting situations).
    - elEpHantiaSis 4y ago
      Thanks for clearing that up for me, that makes alot more sense as a puzzle. I wonder if it's something to do with corporate lobbying and a "if you scratch my back, I'll scratch yours" game going on. For instance "If you give me the money (buy my overpriced bonds) I can do the things that get me re-elected, and meanwhile I can look into revising that bill you wanted me to look at." Just a conspiracy theory though, I'm way too blue collar to properly understand this sorta stuff.