Bias in Finance

Over at OvercomingBias, Robin Hanson blogs about my SSRN Paper:

My asking around a bit confirms Eric; finance folks’ reaction is that everyone is sure there is a positive risk premium even though they admit the data isn’t very clear and everyone also knows relative wealth preferences exist and if strong enough could eliminate the risk premium. My quick search didn’t find anyone else taking Eric’s strong position, and he says he can’t find anything either.

My best guess is that Eric is basically right. In fact, I’d guess lower returns for the highest risk investments come from enough investors being risk-loving in relative wealth; they are willing to lose out on average for a chance to gain the very most. However, even if Eric is eventually proven very clearly right, I’m not optimistic that he will get much credit or gain from it.

Read the whole thing.