What The Taming of The Shrew tells us about the equity risk premium

Matthew Partridge distils the financial wisdom found in Shakespeare's play The Taming of the Shrew.

The Taming of the Shrew is a "problem" play by William Shakespeare. It tells the story of a man, Petruchio, who marries the "shrewish" Katherina Minola and "tames" her. Critics see the play as a straightforward tale of a man being cruel to his wife. Others see it as ironic, or even as a screwball comedy. Whatever the correct interpretation, it remains popular, and is currently the second-most performed of Shakespeare's plays. It also spawned a sequel, The Tamer Tamed, written by sometime Shakespeare collaborator John Fletcher in 1611.

The key moment

At the end of the play, Petruchio makes a bet with Hortensio and Lucentio on who has the most obedient wife. To the surprise of the two men, Petruchio not only wins the bet, but Katherina delivers a speech about why wives should submit to their husbands. In it she argues that obedience is "too little reward" for someone who "commits his body/To painful labour both by sea and land/To watch the night in storms, the day in cold/Whilst thou liest warm at home, secure and safe".

The lesson for investors

Katherina's speech is a great metaphor for the equity risk premium. While shareholders aren't involved in the day-to-day running of their firms, they certainly have to take on bigger financial risks than bondholders, and have been badly mauled by the many bear markets in history. In contrast, holders of US or UK government debt only need worry about inflation. However, like the (perhaps somewhat idealised) stoical husbands in her speech, in the long-run, US shares have worked hard, delivering an average of 6.4% a year after inflation, compared with 2% from bonds (the gap is only slightly smaller in the UK).

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Other financial wisdom

At the start of the play, Petruchio makes it clear what he is looking for in a woman when he tells Hortensio that "I come to wive it wealthily in Padua/If wealthily, then happily in Padua". But while mergers are often good for investors in the company being acquired, they are generally bad for shareholders in the acquirer, who have to pay more than a third over the initial share price, according to a 2011 study by JensKengelbach and AlexanderRoos (see page 18).

Dr Matthew Partridge

Matthew graduated from the University of Durham in 2004; he then gained an MSc, followed by a PhD at the London School of Economics.

He has previously written for a wide range of publications, including the Guardian and the Economist, and also helped to run a newsletter on terrorism. He has spent time at Lehman Brothers, Citigroup and the consultancy Lombard Street Research.

Matthew is the author of Superinvestors: Lessons from the greatest investors in history, published by Harriman House, which has been translated into several languages. His second book, Investing Explained: The Accessible Guide to Building an Investment Portfolio, is published by Kogan Page.

As senior writer, he writes the shares and politics & economics pages, as well as weekly Blowing It and Great Frauds in History columns He also writes a fortnightly reviews page and trading tips, as well as regular cover stories and multi-page investment focus features.

Follow Matthew on Twitter: @DrMatthewPartri