Economics, grappled with many unknowns, undoubtedly, radically affects our lives. Paradoxes and puzzles, which combine human behaviour and economics, have been striking subjects for many decades. One of the universally known puzzles,“Equity Premium Puzzle”, denominated by Mehra and Prescott (1985), is comprehensively reviewed throughout this study. Equity risk premium, with its easiest meaning, is the reward for investors holding riskier assets in their portfolios. To calculate it, it is crucial to decide on its determinants; namely, market index, risk-free asset, time period of observations, maturity date of securities, and statistical preferences. As time goes by, the complexity of equity premium has been elevated. Mehra and Prescott (1985), through examining the US data between the years 1889 and 1978, found that plausible values of relative risk aversion cannot explain the magnitude of the risk premium, when used a time-additive utility function. Their results were robust to probable errors in measuring inflation rate, tax considerations, changing time period, data generation process, growth rate persistence, firm’s commitments in fixed payments, and production and capital accumulation into the model.

After the introduction of the puzzle to the literature, large number of studies were done to solve the puzzle. Several studies query whether changing the time period and the location used in the study change the main study’s findings or not. Results of those studies usually support the main findings. Mean aversion and reversion are also incapable of solving the puzzle. Relaxing the parametric limitations, namely, the intertemporal elasticity of substitution and the coefficient of relative risk aversion, on main study do not work, as well. On the other hand, focusing on individual preferences rather than the theoretical and mathematical framework of the puzzle and describing investors as irrational may pave the way to solve the puzzle.