Economists’ views on the ergodicity problem

Doctor, Jason N.; Wakker, Peter P.; Wang, Tong V.

doi:10.1038/s41567-020-01106-x

Cited by 12 publications

(8 citation statements)

References 8 publications

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“…This casts the dynamical dependence of utility functions observed here, not as preference instability per se, but simply as a manifestation of a stable preference for growing wealth over time when facing different circumstances. We refer the interested reader to a theoretical critique [35] written in response to a preprint of this paper and our reply (S4 Text).…”

Section: Theoretical Considerationsmentioning

confidence: 99%

Ergodicity-breaking reveals time optimal decision making in humans

et al. 2021

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Ergodicity describes an equivalence between the expectation value and the time average of observables. Applied to human behaviour, ergodic theories of decision-making reveal how individuals should tolerate risk in different environments. To optimise wealth over time, agents should adapt their utility function according to the dynamical setting they face. Linear utility is optimal for additive dynamics, whereas logarithmic utility is optimal for multiplicative dynamics. Whether humans approximate time optimal behavior across different dynamics is unknown. Here we compare the effects of additive versus multiplicative gamble dynamics on risky choice. We show that utility functions are modulated by gamble dynamics in ways not explained by prevailing decision theories. Instead, as predicted by time optimality, risk aversion increases under multiplicative dynamics, distributing close to the values that maximise the time average growth of in-game wealth. We suggest that our findings motivate a need for explicitly grounding theories of decision-making on ergodic considerations.

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Section: Theoretical Considerationsmentioning

confidence: 99%

Ergodicity-breaking reveals time optimal decision making in humans

et al. 2021

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“…This shift indicates that people use time averages, rather than ensemble averages, as a heuristic for decision making, which is in line with the predictions from ergodicity economics 6 . Despite these exciting findings, the experiment of Meder and colleagues 18 has been criticized for the use of the stationary isoelastic utility function in a dynamic setting 19 . Doctor and colleagues point out that methods such as dynamic programming 20 , 21 would have been more appropriate.…”

Section: Introductionmentioning

confidence: 99%

The influence of ergodicity on risk affinity of timed and non-timed respondents

Vanhoyweghen

Verbeken

Macharis

et al. 2022

Sci Rep

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Expected values are the metric most often used to judge human decision-making; when humans make decisions that do not optimize expected values, these decisions are considered irrational. However, while convenient, expected values do not necessarily describe the evolution of an individual after making a series of decisions. This dichotomy lies at the core of ergodicity breaking, where the expected value (ensemble average) differs from the temporal average of one individual. In this paper, we explore whether the intuition behind human decision-making optimizes for expected values or instead takes time growth rates into account. We do this using several stated choice experiments, where participants choose between two stochastic bets and try to optimize their capital. To evaluate the intuitive choice, we compare two groups, with and without perceived time pressure. We find a significant difference between the responses of the timed and the control group, depending on the dynamic of the choices. In an additive dynamic, where ergodicity is not broken, we observe no effect of time pressure on the decisions. In the non-ergodic, multiplicative setting, we find a significant difference between the two groups. The group that chooses under time pressure is more likely to make the choice that optimizes the experiment’s growth rate. The results of this experiment contradict the idea that people are irrational decision-makers when they do not optimize their expected value. The intuitive decisions deviate more from the expected value optimum in the non-ergodic part of our experiment and lead to more optimal decisions.

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“…There are criticisms of ergodicity economics, notably that economists have already been able to address utility dynamically (Doctor et al, 2020), though these alternative approaches also highlight the limitations of static expected value models. In addition, other authors have proposed the "dismal theorem" of economics modifying expected value formulations (Weitzman, 2009).…”

Section: Lessons From Other Fields Of Study To Address Low-probabilit...mentioning

confidence: 99%

Rethinking disaster risk for ecological risk assessment

Singh,

Sajid,

Khan

et al. 2023

Front. Ecol. Evol.

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While disaster events are consequential, they are rare. Ecological risk assessment processes tend to estimate risk through an “expected value” lens that focuses on the most probable events, which can drastically underappreciate the importance of rare events. Here, we show that expected value and average risk-based calculations underappreciate disaster events through questionable assumptions about equally weighing high probability low impact events with low probability high impact events, and in modeling probability as a chance among an ensemble of possible futures when many contexts of ecological risk assessment are focused on a single entity over time. We propose an update to ecological risk assessment that is specifically inclusive of disaster risk potential by adopting analytical processes that estimate the maximum hazard or impact that might be experienced in the future, borrowing from the practice of modeling “Value at Risk” in financial risk contexts. We show how this approach can be adopted in a variety of data contexts, including situations where no quantitative data is available and risk assessment is based on expert judgement, which is common for ecological risk assessment. Increased exposure to environmental variation requires assessment tools to better prepare for, mitigate, and respond to disasters.

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Economists’ views on the ergodicity problem

Cited by 12 publications

References 8 publications

Ergodicity-breaking reveals time optimal decision making in humans

Ergodicity-breaking reveals time optimal decision making in humans

The influence of ergodicity on risk affinity of timed and non-timed respondents

Rethinking disaster risk for ecological risk assessment

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