This paper addresses the equity premium puzzle, which refers to the empirical observation that stocks have significantly outperformed bonds over the last century. The authors propose a new explanation based on Kahneman and Tversky's 'prospect theory', which incorporates two key concepts: loss aversion and mental accounting. Loss aversion means investors are more sensitive to losses than gains, and mental accounting refers to how individuals evaluate financial outcomes. The authors introduce the concept of "myopic loss aversion," where investors frequently evaluate their portfolios, even with long-term investment goals. Using simulations, they find that the size of the equity premium is consistent with the parameters of prospect theory if investors evaluate their portfolios annually. This suggests that investors choose portfolios as if they had a one-year time horizon. The paper also explores the size effect, suggesting that myopic loss aversion may explain why small firms have outperformed large firms. The authors conclude that myopic loss aversion provides a plausible solution to the equity premium puzzle and offers insights into other asset pricing anomalies.This paper addresses the equity premium puzzle, which refers to the empirical observation that stocks have significantly outperformed bonds over the last century. The authors propose a new explanation based on Kahneman and Tversky's 'prospect theory', which incorporates two key concepts: loss aversion and mental accounting. Loss aversion means investors are more sensitive to losses than gains, and mental accounting refers to how individuals evaluate financial outcomes. The authors introduce the concept of "myopic loss aversion," where investors frequently evaluate their portfolios, even with long-term investment goals. Using simulations, they find that the size of the equity premium is consistent with the parameters of prospect theory if investors evaluate their portfolios annually. This suggests that investors choose portfolios as if they had a one-year time horizon. The paper also explores the size effect, suggesting that myopic loss aversion may explain why small firms have outperformed large firms. The authors conclude that myopic loss aversion provides a plausible solution to the equity premium puzzle and offers insights into other asset pricing anomalies.