Abstract
The equity premium puzzle has confounded economists since its presentation in 1985. Numerous solutions have been offered that challenge the risk aversion coefficient or α. These solutions have been discredited due to “implausibly large” levels of risk aversion. However, when examining the Allais paradox, we find these “implausibly large” levels of risk aversion. These levels of risk aversion are also present in analysis of contestant behavior from the game show Deal or No Deal. By incorporating Ellsberg's (1961) ambiguity parameters into an overall risk aversion coefficient, we are able to define a more theoretically robust α. The puzzle appears not to be the equity premiums witnessed over time; rather the true puzzle is the rationale of the artificial risk aversion parameter constraints.
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