Author Question: Briefly describe the equity premium paradox of investments. What will be an ideal ... (Read 54 times)

mrsjacobs44 · **on:** Jun 20, 2018

Briefly describe the equity premium paradox of investments.

What will be an ideal response?

Question 2

Define procedural invariance.

What will be an ideal response?

phuda · **Reply #1 on:** Jun 20, 2018

Answer to Question 1

Answer: In order to maximize gains, an investor should put his/her capital into the stock market which is relatively volatile but profitable. However, many investors choose to invest in low variability-low payoff investments like bonds. Research evidence suggests that loss aversion is why people avoid the more volatile stock market.

Answer to Question 2

Answer: Procedural invariance refers to asking the same question in two ways. For instance, people can indicate their preferences by answering Which of these two gambles would you prefer to play? Another way to ask the same question is How much would you be willing to pay to have an opportunity to play each of these gambles? It is assumed that if you would be willing to choose a particular gamble that you would also be willing to pay more for that gamble as well.