Lars P. Syll — Ergodicity – probabilistic thinking gone awry

Simple explanation of ergodicity and why using ergodic economic models purporting to be representational in planning or policy formulation is a very bad idea, as the recent crisis showed.

Economists have long relied on the equality of ensemble and time averages, assuming that the probabilities they deal with often have this feature. But the multiplicative growth process involved in any situation of repeated gambles is necessarily not ergodic. Go broke at one time step, and you are permanently out of the game, stuck at wealth = 0, a situation never captured by the ensemble average, which assumes continued exploration of the space of outcomes.

When continued exploration of outcomes and the tendency to equilibrium are assumed, the risk of catastrophic loss and persistent instability is discounted unrealistically and therefore imprudently.

Lars P. Syll's Blog
Ergodicity – probabilistic thinking gone awry
Lars P. Syll | Professor of Social Science, Malmo University