Speaker: Ole Peters

Title: The ergodicity problem in economics

Abstract: The ergodicity problem queries the equality or inequality of time averages and expectation values. I will trace its curious history, beginning with the origins of formal probability theory in the context of gambling and economic problems in the 17th century. This is long before ergodicity was a word or a known concept, which led to an implicit assumption of ergodicity in the foundations of economic theory. 200 years later, when randomness entered physics, the ergodicity question was made explicit. Over the past decade I have asked what happens to foundational problems in economic theory if we export what is known about the ergodicity problem in physics and mathematics back to economics. Many problems can be resolved. Following an overview of our theoretical and conceptual progress, I will report on a recent experiment that strongly supports our view that human economic behavior is better described as optimizing time-average growth rates of wealth than as optimizing expectation values of wealth or utility of wealth.

Bio: Ole Peters is a Fellow at the London Mathematical Laboratory and External Professor at the Santa Fe Institute. He works on different conceptualizations of randomness in the context of economics. His thesis is that the mathematical techniques adopted by economics in the 17th and 18th centuries are at the heart of many problems besetting the modern theory. Using a view of randomness developed largely in the 20th century he has proposed an alternative solution to the discipline-defining problem of evaluating risky propositions. This implies solutions to the 300-year-old St. Petersburg paradox, the leverage optimization problem, the equity premium puzzle, and the insurance puzzle. It leads to deep insights into the origin of cooperation and the dynamics of economic inequality. He maintains a popular blog at https://ergodicityeconomics.com/ that also hosts the ergodicity economics lecture notes.