An opportunity to become more confused about the "equity risk premium" should not be passed up.
Daniel Altman lends a hand in Why Do Stocks Pay So Much More Than Bonds?
excerpt:
Think about the two types of securities in terms of supply and demand. The market for safe government bonds includes investors who can't buy stocks at all: foreign central banks, other government agencies, some institutional money managers and certain kinds of trusts. Moreover, financial planners may be too eager for their clients to buy safe government bonds. If their paychecks depended solely on whether their clients made or lost money, they might try to avoid losses at all costs.
In other words, it may just be ridiculously easy to raise money for bonds. Or investors' expectations of stock returns may be irrationally low, focused more on crashes than booms. Either way, the equity risk premium wouldn't explain the entire gap in returns.
We do know, though, that the risk premium must be some part of that gap. According to research by William N. Goetzmann and Robert G. Ibbotson, two finance professors at Yale, that premium has stayed fairly constant over long periods through virtually all of American history. For lack of a better reason, there may just be something special about American capital markets, so that a high equity premium would tend to revert to some sort of long-run average. In other words, the equity premium may be a partial predictor of future stock returns and even the future growth of the economy.
Yet many financial economists believe that the equity risk premium has been dropping in recent times. "Over the last 20 or 30 years there have been dramatic changes in the financial markets," said John C. Heaton, a professor of finance at the University of Chicago. "Investors have become just more comfortable with the stock market. Part of that is education. The other thing is sort of a classic finance effect, which is that the level of diversification that investors have available to them has increased."