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Wising up to the equity premium: "Bryan Caplan, one of my favourite bloggers, is so convinced of the equity premium that he invests accordingly.I'm not sure this is wise. The problem is that if the equity premium is a genuine anomaly, it should disappear as investors wise up to it; there might be $10 bills on the sidewalk occasionally, but they don't stay there for long.And investors have had two decades to learn about the equity premium. It's 21 years ago this month that Mehra and Prescott published their original paper (pdf) on it. In those 21 years, US equities have returned 13% a year, against 8.2% for bonds. As a result, according to Robert Shiller's figures, the US market is now highly priced relative to history; a price-earnings ratio of 18 compared to a long-term average of 13.8 using 12 months' earnings, or a PE of 26.6 against a long-run average of 14.9 using 10-year earnings.These high prices might be a sign that investors have partially wised up to the equity premium, and have driven prices up to levels from which subsequent returns will be lower. "