John Quiggin of Crooked Timber has a new paper out about the Equity Premium. Serious science of course and thus not only not understandable but also not available to mere mortals like myself.

Larry Elliott in The Guardian has a note on the same subject. John’s paper is about what the implications of the existence of the premium are, the newspaper bit more about how it comes about:

Those who believe
successful financial speculators are somehow different from the rest of
us could well be right, according to research.

A
study by Baba Shiv, associate professor of marketing at Stanford
University, found that emotions get in the way of making prudent
decisions. Shiv gave 41 participants $20 each at the start of a
20-round gambling game. Players could either bet $1 on the toss of a
coin in every round or pass. If they called correctly, they won $2.50,
if they called incorrectly they lost their dollar. If they decided not
to play they kept their dollar.

The
most profitable approach was to play every round. Why? Because with a
50-50 chance of calling right, the expected value of playing would be
$1.25 a round, while the expected value of not playing was $1. Those
who had suffered damage in the areas of the brain that affected
emotions took the profitable approach.

The
"normal" participants became more cautious as the game went on, with
their decision to play or not affected by what had happened in the
previous round. They played less and won less money. Researchers said
the experiment helped to explain why investors favoured low-risk bonds
when equity returns have been historically much higher. According to
the researchers those who made a mint by controlling their emotions are
"functional psychopaths".

So now we know the truth about Warren Buffett and George Soros.