Finance:Ergodicity economics
Ergodicity economics is a research programme aimed at reworking the theoretical foundations of economics in the context of ergodic theory.[1] The project's main goal is to understand how traditional economic theory, framed in terms of the expectation values of ensembles, changes when replacing expectation value averages with time averages. In particular, the programme is interested in understanding the effect of non-ergodic processes in economics, that is processes where the expectation value of an observable does not equal its time average.
Background
The ergodicity economics research programme originated in two papers by Ole Peters in 2011, a theoretical physicist and current external professor at the Santa Fe Institute.[2] The first studied the problem of optimal leverage in finance and how this may be achieved by considering the non-ergodic properties of geometric brownian motion.[3] The second paper applied principles of non-ergodicity to propose a possible solution for the St. Petersburg paradox.[4] More recent work has suggested possible solutions for the equity premium puzzle, the insurance puzzle, gamble-selection, probability weighting, and has provided insights into the dynamics of income inequality.[5]
Coverage in the wider media
In December 2020, Bloomberg news published an article titled "Everything We’ve Learned About Modern Economic Theory Is Wrong"[6] discussing the implications of ergodicity in economics following the publication of a review of the subject in Nature Physics.[5] Morningstar covered the story to discuss the investment case for stock diversification.[7]
In the book Skin in the Game, Nassim Nicholas Taleb suggests that the ergodicity problem requires a rethinking of how economists use probabilities.[8] A summary of the arguments was published by Taleb in a Medium article in August 2017.[9]
In the book The End of Theory, Richard Bookstaber lists non-ergodicity as one of four characteristics of our economy that are part of financial crises, that conventional economics fails to adequately account for, and that any model of such crises needs to take adequate account of.[10] The other three are: computational irreducibility, emergent phenomena, and radical uncertainty.[citation needed]
In the book The Ergodic Investor and Entrepreneur, Boyd and Reardon tackle the practical implications of non-ergodic capital growth for investors and entrepreneurs, especially for those with a sustainability, circular economy, net positive, or regenerative focus.[11]
James White and Victor Haghani discuss the field of ergodicity economics in their book The Missing Billionaires.[12]
Criticisms
The approach and relevance of the ergodicity economics research program has been criticised significantly by mainstream economists. They argue that the program misstates the content and predictions of mainstream economic theory in criticizing it, and that the basic ergodicity economics model makes obviously false predictions about behavior.[13] An experiment[14] carried out by neuroscientists in Denmark which "would corroborate ergodicity economics and falsify expected utility theory" has also been particularly criticised for its methods and for overstating its results.[15]
See also
References
- ↑ "Economics – London Mathematical Laboratory". http://lml.org.uk/research/economics/.
- ↑ "Ole Peters | Santa Fe Institute" (in en). https://www.santafe.edu/people/profile/ole-peters.
- ↑ Peters, Ole (November 2011). "Optimal leverage from non-ergodicity". Quantitative Finance 11 (11): 1593–1602. doi:10.1080/14697688.2010.513338.
- ↑ Peters, Ole (13 December 2011). "The time resolution of the St Petersburg paradox". Philosophical Transactions of the Royal Society A: Mathematical, Physical and Engineering Sciences 369 (1956): 4913–4931. doi:10.1098/rsta.2011.0065. PMID 22042904. Bibcode: 2011RSPTA.369.4913P.
- ↑ 5.0 5.1 Peters, Ole (December 2019). "The ergodicity problem in economics". Nature Physics 15 (12): 1216–1221. doi:10.1038/s41567-019-0732-0. Bibcode: 2019NatPh..15.1216P.
- ↑ Kochkodin, Brandon (11 December 2020). "Everything We've Learned About Modern Economic Theory Is Wrong" (in en). Bloomberg.com. https://www.bloomberg.com/news/articles/2020-12-11/everything-we-ve-learned-about-modern-economic-theory-is-wrong.
- ↑ Rekenthaler, John (17 December 2020). "Why Most Stocks are Losers" (in en). Morningstar, Inc.. https://www.morningstar.com/articles/1015274/why-most-stocks-are-losers.
- ↑ Taleb, Nassim Nicholas (20 February 2018). Skin in the game. London. ISBN 9780241247488.
- ↑ Taleb, Nassim Nicholas (15 August 2018). "The Logic of Risk Taking" (in en). https://medium.com/incerto/the-logic-of-risk-taking-107bf41029d3.
- ↑ Bookstaber, Richard (2 May 2017). The End of Theory. Princeton. ISBN 9780691169019.
- ↑ Boyd, Graham; Reardon, Jack (1 May 2023). The Ergodic Investor and Entrepreneur. London. ISBN 9781913629199.
- ↑ Haghani, Victor; White, James (2023). The Missing Billionaires: A Guide to Better Financial Decisions (1st ed.). Wiley. ISBN 978-1119747918.
- ↑ Doctor, Jason N.; Wakker, Peter P.; Wang, Tong V. (December 2020). "Economists' views on the ergodicity problem". Nature Physics 16 (12): 1168. doi:10.1038/s41567-020-01106-x. Bibcode: 2020NatPh..16.1168D.
- ↑ Meder, David; Rabe, Finn; Morville, Tobias; Madsen, Kristoffer H.; Koudahl, Magnus T.; Dolan, Ray J.; Siebner, Hartwig R.; Hulme, Oliver J. (2021). "Ergodicity-breaking reveals time optimal decision making in humans". PLOS Computational Biology 17: 1-25. doi:10.1371/journal.pcbi.1009217.
- ↑ Goldstein, Adam (31 January 2020). "Did Ergodicity Economics and the Copenhagen Experiment Really Falsify Expected Utility Theory?" (in en). https://medium.com/@aa_goldstein/did-ergodicity-economics-and-the-copenhagen-experiment-really-falsify-expected-utility-theory-3f375ac07d32.
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