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Informational Limits behind the Puzzle

Author

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  • Lee, Woongki

    (Yonsei University)

Abstract

Some level of consumption is indispensable for survival. Human well-being, however, depends not only on present consumption but also on the expectation that consumption can be sustained in the future. Traditional economic models do not fully capture this forward-looking psychological dimension. This study revises the standard utility specification by incorporating expectation-based satisfaction. It also recognizes that consumers predict their own future consumption better than researchers do. Because utility depends directly on these private predictions, informational asymmetry matters for empirical asset pricing. The study shows how accounting for this asymmetry can help explain empirically high equity premia and low risk-free rates.

Suggested Citation

  • Lee, Woongki, 2026. "Informational Limits behind the Puzzle," SocArXiv kghzv_v1, Center for Open Science.
    • Handle: RePEc:osf:socarx:kghzv_v1
    DOI: 10.31235/osf.io/kghzv_v1
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    References listed on IDEAS

    as
    1. Hansen, Lars Peter & Richard, Scott F, 1987. "The Role of Conditioning Information in Deducing Testable," Econometrica, Econometric Society, vol. 55(3), pages 587-613, May.
    2. Weil, Philippe, 1989. "The equity premium puzzle and the risk-free rate puzzle," Journal of Monetary Economics, Elsevier, vol. 24(3), pages 401-421, November.
    3. Epstein, Larry G & Zin, Stanley E, 1991. "Substitution, Risk Aversion, and the Temporal Behavior of Consumption and Asset Returns: An Empirical Analysis," Journal of Political Economy, University of Chicago Press, vol. 99(2), pages 263-286, April.
    4. Larry G. Epstein & Stanley E. Zin, 2013. "Substitution, risk aversion and the temporal behavior of consumption and asset returns: A theoretical framework," World Scientific Book Chapters, in: Leonard C MacLean & William T Ziemba (ed.), HANDBOOK OF THE FUNDAMENTALS OF FINANCIAL DECISION MAKING Part I, chapter 12, pages 207-239, World Scientific Publishing Co. Pte. Ltd..
    5. repec:bla:jfinan:v:59:y:2004:i:4:p:1481-1509 is not listed on IDEAS
    6. Loewenstein, George, 1987. "Anticipation and the Valuation of Delayed Consumption," Economic Journal, Royal Economic Society, vol. 97(387), pages 666-684, September.
    7. repec:spo:wpmain:info:hdl:2441/8686 is not listed on IDEAS
    8. Rietz, Thomas A., 1988. "The equity risk premium a solution," Journal of Monetary Economics, Elsevier, vol. 22(1), pages 117-131, July.
    Full references (including those not matched with items on IDEAS)

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