take place in times of normal economic activity. Resource Allocation When there is a large risk premium associated with equity, there is a high cost of systematic risk in returns. One of these being its potential implications on individual portfolio decisions. Some research has argued that high rates of return are just signs of misplaced risk-aversion in which investors are able to earn high returns with little risk from switching from stocks to other assets such as bonds. Research on the contrary indicates that a large percentage of the general public believe that the stock market is best for investors that are in it for the long haul and may also link to another implication being trends in the equity premium. Some claims have been made that the equity premium has declined over time in the past few years and may be supported by other studies claiming that tax declines may also continue to reduce the premium and the fact that transaction costs in securities markets decline this is consistent with a declining premium. The trend implication is also supported by models such as 'noise traders' that create a cyclical premium due to noise traders being excessively optimistic thus declining the premium, and vice versa when the optimism is replaced with pessimism, this would explain the constant decline of equity premium as a stock price bubble. See also Ellsberg paradox Fed model Loss aversion Risk aversion List of cognitive biases Economic puzzle Forward premium anomaly Real exchange-rate puzzles References Further reading Behavioral finance Finance theories Stock market 1985 introductions Economic puzzles Prospect theory