Ergodicity Economics in Plain English

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Abstract

This paper presents an overview of Ergodicity Economics (EE) in plain English.

Ergodicity Economics (EE) applies a modern mathematical formalization to familiar financial concepts to reveal implications, and consequences that were previously unseen.

EE provides a clear distinction between:

  • methods of averaging (arithmetic means vs. geometric means),
  • meanings of averaging (ensemble expectation vs. time average), and
  • reasons for the different meanings (additive vs. multiplicative growth dynamics).

These are distinctions with a difference because the average experience of an ensemble over many trajectories may not be the average experience of an individual over a single life history. Using ensemble expectations inappropriately - i.e. for non-ergodic observables – misleads individuals because it implies a physical system of counterfactuals that cannot exist in a single life trajectory.

EE quantifies the differences and the trade-offs between the collective meaning and the individual meaning of financial methods. EE’s perspective opens up previously unseen distinctions for evidence-based recommendations. These distinctions enable the creation of previously unavailable recommendations for the explicit benefit of individual clients. This differentiating impact on economic theory, asset valuation, product development, and advisory best practices is developing rapidly.

Versions

➤  Version 1 (2020-03-07)

Citation

Francois Gadenne (2020). Ergodicity Economics in Plain English. Researchers.One, https://researchers.one/articles/ergodicity-economics-in-plain-english/5f52699d36a3e45f17ae7e4e/v1.

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