Resource Allocation in the Brain and the Equity Premium Puzzle

Abstract

Findings from the brain sciences show that rather than assuming that human beings pursue their own self- interests, it is more accurate to say that the human brain does so. This is because the brain must first optimize on its own internal resources before seeking to optimize on the resources available in the external world. We show that this modest change is perspective, from self-interested human beings to self-interested brains can resolve the key macro-finance puzzles of broad interest: high equity premium which is countercyclical with a low and stable risk-free rate.

Keywords: Equity Premium, Countercyclical Equity Premium, Cognitive Factors in Decision Making, Resource Allocation in the Brain

JEL Classification: G12, G10, G00, G40, G41