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The ergodicity problem in economics

Ole Peters (2019)

Arthur Jongejans

March 8, 2024

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The ergodic hypothesis

Introduction

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The ergodic hypothesis

Introduction

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T₁

T₂

T

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The traditional view: homo economicus

Rational
Self-interested
Maximizes utility

Part 1: The traditional view

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Example

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The traditional view: problems arise

St. Petersburg paradox

Part 1: The traditional view

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Part 1: The Traditional View

Outline the foundational assumptions of Homo Economicus, focusing on rationality, self-interest, and the maximization of utility.
Discuss the limitations of this view, particularly in handling time and uncertainty.

The problem is, people don’t take the deal! How can we explain this phenomenon.

Thomas Hurka’s St Petersburg Paradox: Suppose you are offered a deal—you can press a button that has a 51% chance of creating a new world and doubling the total amount of utility, but a 49% chance of destroying the world and all utility in existence. If you want to maximise total expected utility, you ought to press the button—pressing the button has positive expected value. But the problem comes when you are asked whether you want to press the button again and again and again—at each point, the person trying to maximise expected utility ought to agree to press the button, but of course, eventually they will destroy everything.

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The traditional view: problems arise

St. Petersburg paradox
Time

Part 1: The traditional view

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U_brave (u=x)

U_scared (u= ln(x))

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Ergodicity economics

Part 2: Ergodicity

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Fred’s Wealth

T

T₀	T₁	T₂
10	15	9

Growth rate

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The ergodic hypothesis does not hold

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Two opposing economic theories

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Expected Utility Theory

Ergodicity Economics

U_brave (u=x)

U_scared (u= ln(x))

Sometimes scared

Sometimes brave

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The coin-toss experiment

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Two critiques of mainstream economics

Expected Utility Theory fails to explain the changing utility functions
Expected Utility Maximisers don’t maximise utility (short-termist)

“In maximising the expectation value […], expected utility theory implicitly assumes that individuals individuals can interact with themselves, effectively in parallel universes. […] That may reflect what happens in a specially designed large collective, but it does not reflect the situation of an individual decision maker.”

- Ole Peters (2019)

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Part 5: Implications for Economic Theory and Policy

Explore how the Homo Ergodicus model could influence economic theory, including risk assessment, utility theory, and behavioral economics.
Discuss potential policy implications, emphasizing how a deeper understanding of ergodicity could lead to more effective economic policies.

Homo economicus: has been criticised often for being shorttermist, but that should be no surprise given that time is so poorly represented.
Our new homo ergodicus can be rather nice, he can understand that cooperation leads to better long term outcomes

Thomas Hurka’s St Petersburg Paradox: Suppose you are offered a deal—you can press a button that has a 51% chance of creating a new world and doubling the total amount of utility, but a 49% chance of destroying the world and all utility in existence. If you want to maximise total expected utility, you ought to press the button—pressing the button has positive expected value. But the problem comes when you are asked whether you want to press the button again and again and again—at each point, the person trying to maximise expected utility ought to agree to press the button, but of course, eventually they will destroy everything.

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Economic implications

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Growth maximisation

Uncertainty introduced

Ergodicity Economics

Expected Utility Theory

Growth rate

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Utility Theory (Ensemble Average)

Part 1: The traditional view

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