Related Experiment Video
Updated: Aug 12, 2026
06:18
The Collective Trust Game: An Online Group Adaptation of the Trust Game Based on the HoneyComb Paradigm
Published on: October 20, 2022
What stock market returns to expect for the future?
1Massachusetts Institute of Technology, USA.
Social Security Bulletin
|December 29, 2000
Summary
Social Security reform proposals often assume a 7.0% real stock return. However, current market conditions and economic growth projections suggest this figure is too high, indicating potential overvaluation or a need for revised return assumptions.
Area of Science:
- Economics
- Finance
- Actuarial Science
Background:
- The Office of the Chief Actuary (OCACT) has historically used a 7.0% real return for stocks in Social Security reform projections.
- This assumption, coupled with a 3.0% real return for Treasury bonds, implies a 4.0% long-run equity premium.
Purpose of the Study:
- To evaluate the appropriateness of the 7.0% real stock return assumption used by OCACT for Social Security reform projections.
- To analyze current market conditions, economic growth forecasts, and investor behavior to determine a more accurate equity premium.
Main Methods:
- Analysis of historical realized equity premiums (e.g., 3.5% average, 5.2% from 1926-1998).
- Assessment of factors influencing the required equity premium, including increased mutual fund use and broader stock market participation.
- Application of economic growth models (e.g., Solow model) and financial valuation formulas (e.g., Gordon formula) to current market data.
Main Results:
- Current market conditions, including high stock prices and projected slower economic growth, are inconsistent with a 7.0% real stock return.
- Valuation models suggest a long-run return closer to 4.0%-4.5% under plausible assumptions for adjusted dividends and GDP growth.
- Historical data shows lower subsequent returns following periods of high relative stock values.
Conclusions:
- The 7.0% real stock return assumption for Social Security reform projections is likely too high, suggesting the stock market may be overvalued.
- A lower equity premium is more consistent with current trends in investor behavior and market valuations.
- Recommended approaches include adopting a lower return for the entire projection period or assuming lower short-term returns followed by the 7.0% rate thereafter.
Related Concept Videos
01:52Regression Toward the Mean
Regression toward the mean (“RTM”) is a phenomenon in which extremely high or low values—for example, and individual’s blood pressure at a particular moment—appear closer to a group’s average upon remeasuring. Although this statistical peculiarity is the result of random error and chance, it has been problematic across various medical, scientific, financial and psychological applications. In particular, RTM, if not taken into account, can interfere when researchers try to extrapolate results...
01:15Expected Value
The expected value is known as the "long-term" average or mean. This means that over the long term of experimenting over and over, you would expect this average. The expected average is represented by the symbol μ. It is calculated as follows:In the equation, x is an event, and P(x) is the probability of the event occurring.The expected value has practical applications in decision theory.This text is adapted from Openstax, Introductory Statistics, Section 4.2 Mean or Expected Value and...
01:19Expected Frequencies in Goodness-of-Fit Tests
A goodness-of-fit test is conducted to determine whether the observed frequency values are statistically similar to the frequencies expected for the dataset. Suppose the expected frequencies for a dataset are equal such as when predicting the frequency of any number appearing when casting a die. In that case, the expected frequency is the ratio of the total number of observations (n) to the number of categories (k).
01:08Determination of Expected Frequency
Suppose one wants to test independence between the two variables of a contingency table. The values in the table constitute the observed frequencies of the dataset. But how does one determine the expected frequency of the dataset? One of the important assumptions is that the two variables are independent, which means the variables do not influence each other. For independent variables, the statistical probability of any event involving both variables is calculated by multiplying the individual...
01:03Prediction Intervals
The interval estimate of any variable is known as the prediction interval. It helps decide if a point estimate is dependable.
However, the point estimate is most likely not the exact value of the population parameter, but close to it. After calculating point estimates, we construct interval estimates, called confidence intervals or prediction intervals. This prediction interval comprises a range of values unlike the point estimate and is a better predictor of the observed sample value, y.
The...
However, the point estimate is most likely not the exact value of the population parameter, but close to it. After calculating point estimates, we construct interval estimates, called confidence intervals or prediction intervals. This prediction interval comprises a range of values unlike the point estimate and is a better predictor of the observed sample value, y.
The...
01:26Equity Theory
Equity theory explains how our sense of fairness influences the dynamics of close relationships. Rooted in social psychology, the theory posits that individuals evaluate fairness by comparing the ratio of their contributions to the rewards they receive. Relationship satisfaction is highest when these ratios are perceived as balanced between partners, promoting mutual reciprocity and a sense of justice.Equity vs. Equality in RelationshipsEquity is distinct from equality. Fairness does not...