The equity premium puzzle originates from the observation that equity returns exceeded the risk-free rate to an extent that is inconsistent with the covariance of returns with consumption risk and reasonable levels of risk aversion—at least when average rates of return are taken to represent expectations. Some explanations for this puzzle focus on incomplete risk sharing or on habit formation. Other explanations are empirically based. For example, the puzzle emerges primarily from excess returns in the post–World War II period. It is plausible that the extent of the economic success of the United States in the post-war period was unexpected, making historical averages unrepresentative of prior expected values. Alternative estimates of expected returns using the dividend growth model instead of average returns suggest that excess returns on stocks were high largely because of unexpectedly large capital gains. pl856