are unknown, the rational examination of the equity product would have accurately predicted the observed ballpark values. From the information derivatives viewpoint consumption optimization is just one possible goal (which never really comes up in practice in its pure academic form). To a classically trained economist this may feel like a loss of a fundamental principle. But it may also be a much needed connection to reality (capturing the real behavior of live investors). Viewing equities as a stand-alone product (information derivative) does not isolate them from the wider economic picture. Equity investments survive in competition with other strategies. The popularity of equities as an investment strategy demands an explanation. In terms of data this means that the information derivatives approach needs to explain not just the realized equities performance but also the investor-expected equity premia. The data suggest the long-term equity investments have been very good at delivering on the theoretical expectations. This explains the viability of the strategy in addition to its performance (i.e. in addition to the equity premium). Market failure explanations Two broad classes of market failure have been considered as explanations of the equity premium. First, problems of adverse selection and moral hazard may result in the absence of markets in which individuals can insure themselves against systematic risk in labor income and noncorporate profits. Second, transaction costs or liquidity constraints may prevent individuals from smoothing consumption over time. In relation to transaction costs, there are significantly greater costs associated with trading stocks than trading bonds. These include costs to acquire information, broker fees, taxes, load fees and the bid-ask spread. As such, when shareholders attempt to capitalise on the equity premium by adjusting their asset allocation and purchasing more stocks, they incur significant trading costs which eliminate the gains from the equity premium. However, Kocherlakota (1996) contends that there is insufficient evidence to support this proposition and further data about the size and sources of trading costs need to be collected before this proposition could be validated. Denial of equity premium A final possible explanation is that there is no puzzle to explain: that there is no equity premium. This can be argued from a number of ways, all of them being different forms of the argument that we don't have enough statistical power to distinguish the equity premium from zero: Selection bias of the US market in studies. The US market was the