Ole Peters speaks at CCS 2016
LML Resident Fellow Ole Peters will deliver a talk entitled “Economics without assuming ergodicity” in the session “Non-Stationarity and Ergordicity in Economic and Financial Systems.”
The mathematics of randomness began in the 1650s, with imagined parallel worlds where all possible events coexist. Economics immediately adopted the new concepts, especially expectation values, as its most basic foundation. The 1700s saw challenges to the nascent economic formalism but found patches, notably utility theory, to keep it alive. In the 1870s the mathematics of randomness took a leap forward with Maxwell and Boltzmann realising that an average across parallel worlds may not be reflective of an average over time. These developments made the earlier patches unnecessary, but by this time the formalism had become too established to adapt. Boltzmann coined the term “ergodicity”, and questioned the meaning of expectation values. The following century saw great refinements and mathematical formalisation of the concept of ergodicity. Over the last few decades we have seen much interest in what happens when ergodicity is absent. In my talk I will ask this question in the context of economic thinking. Economics, broadly, is based on the assumption of noisy growth, which is mathematised with non-stationary non-ergodic models, most famously geometric Brownian motion. The non-ergodicity of these processes yields deep insights into decision theory, the emergence of cooperation, insurance and derivatives pricing, market efficiency, the equity premium puzzle, central-bank interest rate setting, discounting, the dynamics of wealth inequality, about which Yonatan Berman will speak later in the session, and presumably many more important areas.