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Ergodicity: How irreversible outcomes affect long-term performance in work, investing, and relationships
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By Luca Dellanna
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Amazon: Link
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#Pg.TC Highlight
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1127Feel free to email me at Luca@Luca-Dellanna.com
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2156In skiing, and life in general, it is not the best ones who succeed. It is the best ones of those who survive.
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3205Too often, we observe a snapshot of someone’s life and believe that we witnessed a piece of short-term performance. But if practice is required to get to a place where one can attempt that, then what we are really observing is long-term performance.
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4215If you have a job, do not attempt to work as hard as possible. Instead, work as hard as you can without risking your health, marriage, or mental sanity. These three are damn hard to recover once lost.
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5218More in general, in any endeavor in which success depends on you accumulating some kind of resource (money, skill, connections, trust[14], etc.), do not maximize growth regardless of survival. Instead, maximize growth that conserves survival.
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6280Whenever an activity cannot be assumed repeatable at infinity, we should be wary of expecting to achieve its average outcome.
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X7339A system is ergodic[24] if its population outcome coincides with the lifetime outcome of each of its components. Otherwise, it is non-ergodic.
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8342The practical implication is that in ergodic systems, you can use the population outcome to make optimal decisions. In non-ergodic systems, you cannot.[25] For example, Russian Roulette is non-ergodic because the lifetime outcome differs from the population outcome. If you keep playing it because you fail to grasp its non-ergodicity and mistakenly believe that your lifetime outcome equals your population one, you will end up dead instead of rich.
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9415Whenever we desire an outcome because we see those that benefited from it, it is good practice asking yourself, do you want the outcome, or do you want the opportunity to take the gamble that produced the outcome? If you only want the former but not the latter, you might be unprepared for what’s to come. … “Fortune favors the living brave.” – Jed Trott
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10446We call “population outcome” the outcome of many people performing an action once, and “lifetime outcome” the outcome of one person performing an action many times. If they differ, the system that produces them is non-ergodic.
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X11635As an individual, you cannot blindly rely on membership of a group for your survival. Instead, become an irreplaceable part of it. This way, the group deems your loss irrecoverable and acts to prevent it at all costs.
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12639Natural selection benefits populations. This is good news if you are a population and bad news if you are one of its weak members. In the latter case, you can turn the tables by making natural selection work for you rather than against you. The trick is to become a population yourself. This is easier than it seems – after all, you already are a population: of habits and beliefs. If you let the feedback you receive from your environment hurt the habits and beliefs that are holding you back, you are effectively making natural selection act inside you rather than on you.[49] You become stronger rather than extinct. You are not your habits nor your beliefs. You are their container. Their survival is not yours. What’s best for them might or might not be what’s best for you.
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13649Over the previous pages, we have seen three “paradoxes” of non-ergodicity. 1) Survival matters more than performance for long-term performance. 2) Something can work on average and still fail, carrying irreversible losses. 3) What’s best for the survival of the individual isn’t necessarily what’s best for the survival of the population, and the other way around.
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X14666A system[51] is ergodic if, for all its components, the lifetime outcome corresponds to the population outcome. Otherwise, it is non-ergodic.
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X15685Using the words of Spear of Lugh[54], Ergodicity is verified if, more or less, every time that you compute a statistical measurement (across space or time), you find the same result. It means that randomness is “well shared.” Another way to see it is that, when you have ergodicity, doing N random experiments in parallel will give you the same result as doing N experiments one after the other.
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16700Here is the common thread: game-overs bring non-ergodicity.
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17737The following chapter will teach you how to do it. Meanwhile, here are a few examples of methods that make you much less likely to hit a “game-over:” – Instead of going all-in on a single bet, take many independent bets.[59] – Use protections (of all kinds – Personal Protective Equipment, insurances, capped-downside options, and so on). – Set aside some buffers and reserves (of money, time, trust, etc.) so that even if you lose everything you committed to an activity, you still have some set aside to recover.[60]
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18782Moreover, as pointed out before, people cannot realistically avoid any non-ergodic activity. We all need to perform many of them in our lives. Therefore, people do not only care whether an activity is non-ergodic; they care how much it is. Hence, for most people, what matters is how much the lifetime outcome diverges from the population outcome in the medium term.  For example, if the time average of my wealth after 70 years is 90% of its expected value, then it is not meaningless to say that the investment is 90% ergodic. Or, if my investment’s time average equals its expected value in 90% of parallel worlds, it is not meaningless to say it is 90% ergodic.
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19829In investing, the barbell strategy consists of allocating part of one’s wealth in non-risky assets and part in risky ones with high upside (the asymmetry being reminiscent of a barbell). Investors who do so find themselves wealthier than those investing all their wealth in medium-risk assets (a shape that would remind of a regular rod). [65] One reason is that a medium-risk investment is less likely to suffer large losses but is not immune to them – and, over long-enough timeframes, “less likely” means “eventually.” The barbell strategy consists of exposing most of yourself to safe activities and a tiny bit of yourself to risky ones with high upside. This is distinct from exposing all of yourself to safe activities[66] most of the time and seldomly to risky ones with high upside. Doing so puts you at risk of game-over while you perform the latter. Conversely, the point of the barbell strategy is to pursue risky activities in a way that caps downside (not by reducing its frequency but its impact).
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20852One lesson from Taleb’s work is that risk management is not about prudence but about removing the risks of “game-over” so that you can be aggressive with other risks. Similarly, the barbell strategy is not about reducing risk in general. Instead, it is about limiting the part of your assets that are exposed to irreversibility. A balanced or medium-risk exposure does not do the trick. It would be like playing Russian Roulette with one-in-twelve bullets rather than one-in-six: it just means that the game-over is delayed but does not prevent it. Conversely, the barbell strategy is like playing Russian Roulette without pointing the gun to your skull but to a $100 banknote. If you’re unlucky (when you’re unlucky), you only lose the banknote, not your life.
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21897I routinely use the Kelly Criterion.[69] As an author, consultant, and researcher, I spend most of my time writing books and essays, working with clients, and doing research. All of these projects take time, and time is money. If I invested all my time for the next three years on a single project or client, I would be in a terrible condition in case of failure. Instead, I allocate my time on a per-project basis. Usually, the larger the upside, the more time I spend on the project. However, I always make sure to never commit all of my time to a single project running for extended time. Too much to lose, both in case the project doesn’t go well or in terms of opportunity costs.
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221086If you want to survive, do not identify with your habits and beliefs but with their container. This way, you will let natural selection remove the habits and beliefs that are holding you down. You will get stronger, thus less likely to become the victim of natural selection yourself.
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231135Decision-makers who can take short-termed decisions without being affected by their long-term consequences take excessive risks. This condition is called moral hazard. Moral hazard happens when someone has incentives to increase an entity’s exposure to risk because he won’t bear the full cost of that risk.
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241166Therefore, a population can decrease its exposure to irreversibility by exposing its members to it. Whether irreversibility has a positive or negative effect depends on the layer observed.
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251221An example: bulletproof jackets work by dispersing the load from the bullet hitting them across a large surface. If the hit load were restricted to a small area, it would pierce the clothing. Incidentally, bulletproof jackets are made of Kevlar, a fiber created by chance by a DuPont researcher. In fact, of the four products that made DuPont’s fortune (Nylon, Kevlar, Nomex, and Teflon), two of them were discovered by chance while researching something else.
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261237As another example, a good friend of mine recently purchased a car. He chose to pay it in monthly installments over five years. He did so even though he had the financial availability to pay it cash. He explained that the loan allowed him to keep a buffer of money in the bank, to manage unexpected problems. If he paid the car cash and lost his job next month, he would be in dire straits. This makes sense! He decided to prioritize survival over optimization, the unexpected over the expected. Conversely, a clueless economist might call irrational the choice to pay something more when there is an option to pay it less. But temporal distribution matters.
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271243Similarly, I’ve recently learned to appreciate actions that seem inefficient but increase my resilience to sudden spikes in load. For example, in the past, I tried to schedule all meetings in the city center on the same weekday, to minimize my travel time. Now, I try to spread them over two days. Yes, it means that I must commute twice. But it also allows me to benefit from unexpected events that would otherwise destroy my schedule, such as a client asking me to stay longer or a friend unexpectedly inviting me for lunch. Pre-emptive redistribution increases resilience and opens up opportunities.
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281249In large organizations, when a project ends, it is common to do a post-mortem (it means “after-death”). It is a meeting in which the project manager and his team meet and ask themselves, “What did go wrong? What should we do differently next time?” Post-mortems bring precious insights. They are a useful practice. Even more useful are PRE-mortems. These are meetings held at the beginning of a project, in which the team asks, “Let’s imagine that the project will have failed. What could have gone wrong? What actions should we take today to avoid this?”
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291361Social ties are, in a way, a form of redistribution of time and care. I give you some of my time when I do not need it. In exchange, I get a chance to get some of your time when I need
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301391Not insuring one’s house means that a fire might cause its owner to go bankrupt. In contrast, a single house taking fire doesn’t cause its insurer to go bankrupt. Therefore, the owner is willing to pay a premium to protect themselves from irreversibility. The insurer is willing to sell this protection from irreversibility because it increases their own exposure less than it decreases it for the owner. This is because the insurer is wealthier than the house owner and can thus tolerate larger temporary losses without going bankrupt.
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311445This is because, in a volatile world, cooperation increases growth by reducing the irreversible losses caused by volatility. It smoothens losses so that an adverse event is less likely to cause you a game over. Moreover, when growth is back, you have more resources left and can therefore capture more of that growth.
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321449Imagine you and I are hunters, and we do not share food. If you undergo a series of unfortunate “no catches,” you might starve and die. Conversely, if we share part of our catches, we reduce the chances of either one of us dying. Not only do we become stronger than the sum of the parts, but each of the parts selfishly benefits too. Even the one that shares more than they receive. This is the advantage of cooperation: it reduces the likelihood of losses that absorb future gains.
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331477In the words of the paper, “individuals poll and share resources because, over a temporal sequence of interactions, it is individually advantageous for them to do so […] group selection is not needed [to explain sharing] because the interests of the group and individual are aligned.” And then, “cooperation […] is advantageous for the simple reason that those who do it outgrow those who do not.”
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341528That said, my point is not “don’t imitate the best one” or “imitate the second-best one.” Instead, it’s “be critical about whose strategies you aim to imitate and why.” Ask yourself, how reproducible is that strategy? In ten parallel universes, in how many do they end up as successful as in this one, and in how many do they end up bankrupt or in jail? Are you okay with not only the outcome in the current universe but also with the full range of outcomes across universes?
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351573Non-ergodicity is undesirable when the lifetime outcome is lower than the population one but desirable when it’s higher.
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361580Customer acquisition. In some businesses, showing your product once to a thousand customers will convert few of them into clients, but showing it ten times to a hundred customers will convert more.
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X371601I spend part of my time helping organizations build a culture of operational excellence. I have observed with my eyes hundreds of companies. I do not know of a single one that built desired habits without obsessing over it for a short period. If a manager can keep their team focused on getting one thing right all the time for about 2-4 weeks, they will have created a lasting habit. Conversely, I have seen many companies whose managers remind their workers about the desired behavior once a week for years. They obtain no result. Of course – they fail to achieve the critical mass required in the minds of their team members to build a habit.
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381607Managers that ignore the non-ergodic nature of behavioral change waste their time and achieve no result. Conversely, those who acknowledge it get quick successes that compound over time.
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X391643The easiest way to increase performance is to narrow the time frame over which it is measured. Sadly, it is also the easiest way to produce unsustainable performance. If your tactic to go faster is to do as if there were no negative consequences, you will go faster, and then you will suffer from the negative consequences. It’s probably not a trade-off worth making.
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X401649If you want to ski fast, it’s very easy. Just keep your skis straight, your knees bent, and go down the slope as straight as possible. You will have a hard time avoiding a crash, but for a few seconds, you will be fast. Most people can be fast. The hard part is being fast while retaining control, to be fast in the short term and the long term. The easiest way to increase short-term performance is to do so at the cost of long-term performance. It is hardly a tradeoff you want to make.
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