The Equity Premium Puzzle

Why are investors so afraid of risk?  Sure, it's possible to lose your shirt (and a posterior portion of your anatomy) in the stock market, but don't the rewards outweigh the danger?

A famous economic study on the equity premium puzzle showed that stocks outperform bonds by so much (on average 6% per year) that you would think that investors would choose more stocks than they do.  To quote Wikipedia's version of the common (and ludicrously conservative) tendency, "To quantify the level of risk aversion implied, investors would have to be indifferent between a bet with a 50 percent chance of $50,000 or $100,000 and a certain payoff of $51,209." 

Why are people so averse to taking small risks that they would do the equivalent of "cashing out" for $1,209 over their WORST possible outcome, forgoing a 50% chance of winning $50K?  And (putting on my Applied Evil Genius hat) how can we turn other people's risk extreme aversion to our own advantage?