ERGODICITY is the new hot topic in economics, but how can you apply it to your life?
(thread)
But first, let's explain ergodicity.
When a context is non-ergodic, average expected outcome is meaningless.
Eg if you play Russian Roulette 60 times, you do not win 50 times. You die
(thread)
But first, let's explain ergodicity.
When a context is non-ergodic, average expected outcome is meaningless.
Eg if you play Russian Roulette 60 times, you do not win 50 times. You die
2/ Two explanations I like:
Non-ergodic: if the average outcome within the group over time is not the same as the average outcome of any individual over time
And 👇
Non-ergodic: if the average outcome within the group over time is not the same as the average outcome of any individual over time
And 👇
3/ In your life, you want to be playing ergodic games, because you can play them as long as you want, allowing for your learnings and assets to compound.
4/ You want to avoid playing non-ergodic games, in which there is a possibility of "gameover".
Gameover might mean death, or might mean "resetting" all your assets, foregoing all benefits incurred so far, and all benefits which you positioned yourself to collect (eg investments)
Gameover might mean death, or might mean "resetting" all your assets, foregoing all benefits incurred so far, and all benefits which you positioned yourself to collect (eg investments)
5/ For example, consider:
- Volatility in an investment does not matter if returns over time are guaranteed to grow at an attractive rate,
- UNLESS said volatility has a potential to make you go bankrupt, foregoing the long-term gains.
- Volatility in an investment does not matter if returns over time are guaranteed to grow at an attractive rate,
- UNLESS said volatility has a potential to make you go bankrupt, foregoing the long-term gains.
6/ Ergodicity is NOT the property of an activity, but of the exposition of the actor.
For example, the same volatile investment is:
- non ergodic if I invest 100% of my wealth
- almost ergodic if I make 100 uncorrelated investments with 1% of my wealth.
For example, the same volatile investment is:
- non ergodic if I invest 100% of my wealth
- almost ergodic if I make 100 uncorrelated investments with 1% of my wealth.
7/ This is why investing your wealth in a startup as a founder is non-ergodic (you might bankrupt) but investing in a set of startups as a found is ergodic (some startups will go bankrupt and yet you will make a return, probably)
8/ In general, what is non-ergodic for an actor at a given layer is ergodic for an actor at a higher enough level.
For example, the life of a single wild animal is non-ergodic (he might die in a fight) but the life of a species (the higher layer) is more ergodic.
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For example, the life of a single wild animal is non-ergodic (he might die in a fight) but the life of a species (the higher layer) is more ergodic.
(continues)
9/ In general, someone can play non-ergodic games in an ergodic way if it plays them with a part of himself which is insulated (i.e. damage at that part does not endanger the individual).
10/ This is why the monolithic has an expiration date (everything is non-ergodic for it)
and why the fractal has a very long life expectancy (most things are ergodic for it).
and why the fractal has a very long life expectancy (most things are ergodic for it).
11/ How can you apply these concepts in your life?
If you are an individual, do not play non-ergodic games with all of yourself.
Use precautions to play them with only an insulated part of yourself.
Direct environmental feedback to parts of yourself.
Example below
If you are an individual, do not play non-ergodic games with all of yourself.
Use precautions to play them with only an insulated part of yourself.
Direct environmental feedback to parts of yourself.
Example below
12/ If you make financial bets, use the Kelly Criterion (only bet a fraction of your wealth, depending on odds and payoffs).
(BTW, the Kelly Criterion is a way to bring as much ergodicity as possible in the non-ergordic).
(BTW, the Kelly Criterion is a way to bring as much ergodicity as possible in the non-ergordic).
13/ If you are a firm, make sure that your units or teams have as much autonomy as possible.
So that if one goes bust, or one's market goes bust, or one's boss goes bust, or one's product goes bust, etc., the others can survive.
So that if one goes bust, or one's market goes bust, or one's boss goes bust, or one's product goes bust, etc., the others can survive.
14/ If you are a country, make sure that you follow a fractal division, with as autonomous states as possible, autonomous cities, etc.
15/ Also:
16/ A note: when above I say "to make ergodic" I mean "to make it as ergodic as possible".
17/ Ergodicity is so important that most of morality could be explained as "do not introduce non-ergodicity".
18/ I wrote a book on ergodicity, and on the adjustments you can make in your life to make it as ergodic as possible: gum.co/powerofa
(⭐️4.2 stars on Goodreads)
(⭐️4.2 stars on Goodreads)
19/ (I forgot to quote @JamesClear, the first lines of tweet #2 are his, AFAIK).
@JamesClear 20/ What is non-ergodic for a monolithic entity can be ergodic for a fractal entity.
(because the non-ergodicity transfers to one of the components of the fractal entity - assuming absence of systemic risk)
(because the non-ergodicity transfers to one of the components of the fractal entity - assuming absence of systemic risk)
