Abstract
Standard finance theory has long identified equity investment with aggregate consumption and equity investors with average consumers, while treating most growth risks as iid. The combination makes it impossible to reconcile high equity risk premia with low risk aversion. Reinterpreting equity markets as gambling casinos with unstable risks cuts a Gordian knot. Enrichment-seeking gamblers pursuing fractional Kelly strategies need a risk premium to maintain net long positions in equities. In simulations that use GDP disaster risks to proxy dividend trends, rational learning induces enough volatile excess volatility to account for risk premia of hundreds of basis points.
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