Thread by @DellAnnaLuca

THOUGHTS ON ERGODICITY

1/ Ergodicity is about eliminating exposure to absorbing barriers.

2/ Two ways to achieve it:
- Avoiding exposing behaviors
- Pursuing exposing behaviors with a part of one's self only which can independently fail.

3/ The "Barbell Strategy" (from Taleb's Antifragile) is about investing most of one's wealth in "ergodic assets" that cannot cause one's wealth to be "absorbed" (aka bankruptcy) while investing at most a fraction of one's wealth into "non-ergodic assets" with ~unbounded upside.

4/ How much is the percentage of one's self (or one's wealth, etc.) that can be exposed to absorbing barriers?

It's the maximum amount that if lost would not cripple the surviving part enough to cause it an inexorable decline.

Minus a safety margin to compensate for uncertainty

5/ Example: if a company "bets" 10% of its wealth on a venture which, if unsuccessful, would leave the company with not enough money to fulfill its financial obligations, then 10% was too much.

6/ Risk management is mostly about transforming non-ergodic exposure into ergodic one.

Stressors from the environment are mostly impossible to fully bound, therefore risk management is mostly about bounding exposure (where possible) and bounding downside (elsewhere).

7/ One way to bound exposure is to bound systemicity.

In other words, bounding the "collateral damage" that arises from a sub-entity being harmed.

Example…

8/ Eg. if a company relies on a single supplier to provide a key component, in case the supplier is hit by harm and unable to supply the parts, it is exposed to collateral damage (cannot produce)

In this case, an entity's dependencies are considered parts of the "broader entity"

9/ Ergodicity is not only a property of an environment, but of the exposure of an entity in an environment.

This matters because, …

10/ …for example, an entity fully exposing itself to an environment might find it non-ergodic, whereas the same entity exposing only a fraction might find it ergodic.

Russian Roulette is an ergodic game for a company which hires Russian Roulette players.

11/ Other risk management strategies, such as the Kelly Criterion, are also about bringing as much ergodicity to the non-ergodic as possible.

And they usually involve pushing non-ergodicity to a fraction of a lower layer of one's self.

12/ (Just some thoughts on ergodicity and risk management; for more, I suggest reading Nassim Taleb's Skin In The Game and @ole_b_peters's writings, which inspired most of the above.)