Six Percent the Theory Can't Pay

For ninety years, from 1889 to 1978, American stocks paid 6.98 percent a year in real terms while the safest short-term debt paid 0.80 percent. The difference, 6.18 percent a year, is the equity premium, and in 1985 Mehra and Prescott showed that the standard general-equilibrium model of a rational saver, fed the measured consumption record, can generate at most 0.35 percent of it over its admissible parameter range. The theory pays one-eighteenth of the bill; matching the record requires relative risk aversion above 30, against a plausibility ceiling near 10, and at risk aversion 30 the model's saver prefers $51,209 certain over a fair 50/50 gamble between $50,000 and $100,000 (certainty equivalent recomputed in the production notebook). This paper prices the four famous doors opened since: habit formation (Campbell and Cochrane 1999), rare disasters (Rietz 1988; Barro 2006: disaster probability about 1.7 percent per year, contractions 15 to 64 percent), myopic loss aversion (Benartzi and Thaler 1995: the premium matches prospect-theory parameters if investors evaluate annually), and the survivorship correction (Dimson, Marsh and Staunton: world premium 4.7 percent, expected 4.5 to 5 percent arithmetic, still about thirteen times the model's ceiling). Every door is open; none is free; each pays the premium only by importing a new assumed quantity rather than deriving it. Grade: DEFECT STANDS — FORTY YEARS, EVERY DOOR PRICED, NONE FREE. This paper belongs to the breadth program of the author's corpus; it touches no claim of the physics core.