Region: How do you explain the equity premium puzzle [the idea that stocks should in theory provide only a 1 percent higher annual return than bonds, but have historically returned nearly 7 percent more]?
Fama: In terms of these consumption-based asset pricing model stories? What I say to the consumption people is: You’re telling me the premium should be about 1 percent a year. Well, you wouldn’t be able to tell the difference between that and zero over a 1,000-year period. And for a 1 percent a year premium, who do you know that would hold stocks? It’s this representative investor, but who is that guy anyway? I wouldn’t hold them. I don’t know anybody else who would. So there’s got to be something missing in those models.