Lars Syll — Why assuming ergodicity makes economics totally irrelevant
...the assumption of the equality of these different averages — technically known as the assumption of “ergodicity” — is considered a given by most of contemporary economics. It makes the mathematics easier in the financial portfolio theory that influences countless investors and in frameworks for designing regulations to keep financial risks at acceptable levels. Unfortunately, this error systematically underestimates prevailing risks.
It also may encourage overly optimistic ideas about the ability of an economy to recover from a crisis. For example, those who support policies of fiscal austerity believe that companies, in seeking to maximize their profits, will naturally drive an economy back to steady growth. The economy will spring back if companies and individuals have confidence that their investments will pay off. If that’s the case, why aren’t businesses investing globally when interest rates are at historic lows. What’s holding them back?
The fairly obvious answer is serious downside risk, which makes the reticence entirely sensible — if you live in the real world where time matters.
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