(Roughly) Daily

The World Clock in Alexanderplatz, Berlin

The set of ideas now called ‘Ergodicity Economics’ is overturning a fundamental concept at the heart of economics, with radical implications for the way we approach uncertainty and cooperation…. starting with the axiom that individuals optimise what happens to them over time, not what happens to them on average in a collection of parallel worlds.

Much of this view rests on a careful critique of a model of human decisionmaking known as expected utility theory. Everyone faces uncertainties all the time, in choosing to take one job rather than another, or deciding how to invest money – in education, travel or a house. The view of expected utility theory is that people should handle it by calculating the expected benefit to come from any possible choice, and choosing the largest. Mathematically, the expected ‘return’ from some choices can be calculated by summing up the possible outcomes, and weighting the benefits they give by the probability of their occurrence.

But there is one odd feature in this framework of expectations – it essentially eliminates time. Yet anyone who faces risky situations over time needs to handle those risks well, on average, over time, with one thing happening after the next. The seductive genius of the concept of probability is that it removes this historical aspect by imagining the world splitting with specific probabilities into parallel universes, one thing happening in each. The expected value doesn’t come from an average calculated over time, but from one calculated over the different possible outcomes considered outside of time. In doing so, it simplifies the problem – but actually solves a problem that is fundamentally different from the real problem of acting wisely through time in an uncertain world.

Expected utility theory has become so familiar to experts in economics, finance and risk-management in general that most see it as the obvious method of reasoning. Many see no alternatives. But that’s a mistake. This inspired [the Ergodicity Theory creators’] efforts to rewrite the foundations of economic theory, avoiding the lure of averaging over possible outcomes, and instead averaging over outcomes in time, with one thing happening after another, as in the real world. Many people – including most economists – naively believe that these two ways of thinking should give identical results, but they don’t. And the differences have big consequences, not only for people trying to do their best when facing uncertainty, but for the basic orientation of all of economic theory, and its prescriptions for how economic life might best be organised.

Of particular importance, the approach brings a new perspective to our understanding of cooperation and competition, and the conditions under which beneficial cooperative activity is possible…

Economists and mathematicians at the London Mathematical Laboratory, together with collaborators including two Nobel laureates from the Santa Fe Institute, propose something altogether different: “How ergodicity re-imagines economics for the benefit of us all.”

* Franklin Delano Roosevelt

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As we consider alternative accounts, we might recall that it was on this date in 2007 that Dodger infielder Chin-Lung Hu, recently acquired by the team, singled in a home game… allowing legendary Dodger announcer Vin Scully remark on-air, “shades of Abbott and Costello, I can finally say, ‘Hu is on first base.'”

Hu, on first

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