Zvi Bodie (paper is free):
It is widely believed that while stocks are risky in the short run, in the long run they are sure to outperform risk-free investments like government bonds. This is a dangerous fallacy. It leads to the illusion that one can earn an equity risk premium without bearing risk. This implies that the stock and bond markets provide unlimited arbitrage opportunities. But these are fake arbitrage opportunities—wishful thinking. In this paper I explain the faulty reasoning behind the fallacy and explore some of its consequences for rules governing tax-qualified individual retirement accounts, the measurement and funding of pension promises by businesses and state and local governments, guarantees provided by the Pension Benefit Guaranty Corporation, and proposals for solving the problems of the Social Security system. Finally, I recommend measures to counteract the fallacy’s harmful effects.