  Financial markets provide a natural quantitative lab for understanding some
of the most advanced human behaviours. Among them is the use of mathematical
tools known as financial instruments. Besides money, the two most fundamental
financial instruments are bonds and equities. More than 30 years ago Mehra and
Prescott found the numerical performance of equities relative to government
bonds could not be explained by consumption-based (mainstream) economic
theories. This empirical observation, known as the Equity Premium Puzzle, has
been defying mainstream economics ever since. The recent financial crisis
revealed an even deeper need for understanding financial products. We show how
understanding the rational nature of product design resolves the Equity Premium
Puzzle. In doing so we obtain an experimentally tested theory of product
design.
