Can future systemic financial risks be quantified?: ergodic vs nonergodic stochastic processes

Abstract

Different axioms underlie efficient market theory and Keynes's liquidity preference theory. Efficient market theory assumes the ergodic axiom. Consequently, today's decision makers can calculate with actuarial precision the future value of all possible outcomes resulting from today's decisions. Since in an efficient market world decision makers "know" their intertemporal budget constraints, decision makers never default on a loan, i.e., systemic defaults, insolvencies, and bankruptcies are impossible. Keynes liquidity preference theory rejects the ergodic axiom. The future is ontologically uncertain. Accordingly systemic defaults and insolvencies can occur but can never be predicted in advance

An Evolutionary Perspective on the Endogenous Instability of Capitalist Dynamics

“…These dynamics are micro-founded since they are also related to the decisions and strategies of private agents. These strategies are framed in a decentralised 'non-ergodic' world (North, 1999;Davidson, 2009). They are based on micro-rational decisions that rely on bounded rationality, evolving and continuously changing through a time-path-dependent process.…”

“…They are based on micro-rational decisions that rely on bounded rationality, evolving and continuously changing through a time-path-dependent process. There is no objective possibility to 'read tea leaves for knowing the future' (Davidson, 2009). Behavioural issues enter the picture, individuals make errors, their judgements are never perfect; they act without any central coordination that would seek rendering separate decisions compatible with each other at the societal level (Evstigneev, Hens, & Schenk-Hoppé, 2016;.…”

The convergences between post Keynesian and developmental approaches: the post Keynesianism applied to emerging countries

“…Risk is probabilistic and can be calculated, unlike uncertainty, which is incalculable (Lavoie, 2007). The fundamental uncertainty characteristic is related to the non-ergodicity of economic processes (Davidson, 2009). Non-ergodicity means that economic agents are not able to obtain an apprenticeship that allows them to be aware of the objective probabilistic distribution of future events.…”

PPP Financing in the Road Sector: A Disequilibrium Analysis Based on the Monetary Circuit

“…The subprime crisis, started in August 2007, confirmed that we leave in a non-ergodic world, since all official forecasts done in the spring were projecting ''vigorous growth'' for the following semesters. For a diagnosis and therapy of the crisis from a non-ergodic perspective, see Davidson ([2007Davidson ([ ] 2009 and Davidson (2009).…”