The equity premium puzzle refers to the fact that stocks have historically outperformed bonds, which is difficult to explain with traditional economic models due to the high level of risk aversion required. Shlomo Benartzi and Richard H. Thaler propose an alternative explanation based on prospect theory, which incorporates loss aversion and frequent portfolio evaluations. Loss aversion means investors are more sensitive to losses than gains, and frequent evaluations suggest investors may have short-term time horizons. This combination, termed "myopic loss aversion," helps explain the equity premium. Simulations show that an annual evaluation period is consistent with the historical equity premium. The paper also suggests that myopic loss aversion may explain the size effect, where small firms have higher returns than large firms. The authors argue that frequent evaluations and loss aversion lead investors to prefer portfolios with a 50-50 split between stocks and bonds. The study also examines how myopic loss aversion applies to institutional investors, such as pension funds and endowments, where short-term evaluations and agency problems may contribute to the equity premium. The findings suggest that myopic loss aversion provides a plausible explanation for the equity premium puzzle and other asset pricing anomalies.The equity premium puzzle refers to the fact that stocks have historically outperformed bonds, which is difficult to explain with traditional economic models due to the high level of risk aversion required. Shlomo Benartzi and Richard H. Thaler propose an alternative explanation based on prospect theory, which incorporates loss aversion and frequent portfolio evaluations. Loss aversion means investors are more sensitive to losses than gains, and frequent evaluations suggest investors may have short-term time horizons. This combination, termed "myopic loss aversion," helps explain the equity premium. Simulations show that an annual evaluation period is consistent with the historical equity premium. The paper also suggests that myopic loss aversion may explain the size effect, where small firms have higher returns than large firms. The authors argue that frequent evaluations and loss aversion lead investors to prefer portfolios with a 50-50 split between stocks and bonds. The study also examines how myopic loss aversion applies to institutional investors, such as pension funds and endowments, where short-term evaluations and agency problems may contribute to the equity premium. The findings suggest that myopic loss aversion provides a plausible explanation for the equity premium puzzle and other asset pricing anomalies.