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The Ergodicity Whisperer…

Ergodicity is the most foundational idea of Nassim Taleb’s ‘Incerto’, which, for those new to the ‘Curious Worldview’ universe, are also the most formational books on my worldview.

It’s a wonderful, wonderful idea… but it takes a few examples to get around it. And no-one is better at simply communicating the complexities of this concept than our very own Italian, and guest on this podcast, Luca Dellanna.

He wrote what is I think the cleanest definition of ergodicity, in his book… wait for it… ‘Ergodicity’. ‘Ergodicity is the difference between the outcome of doing an action once and doing it many times’

But you simply must listen to this short episode to hear that definition expanded upon and allow the concept to settle down and get comfortable in your worldview.

#151 w/ Luca Dellanna - It’s Ergodicity All The Way Down

Link To Luca’s Website Here.

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Here is a transcript of the opening exchange from the conversation…

Ryan
Okay, Luca, welcome sir. You make ergodicity so clearly understandable in the book through examples, but when then I try to go and explain it to somebody, I come up short of words. How does one describe ergodicity without examples?

Luca
Yeah. So for me, ergodicity is the study of the effect of time horizons on decisions and strategies. So what we see is that in the real world there is no such thing as the optimal strategy. It's always the optimal strategy for a given time horizon. and the study of how, of which strategy is optimal for a time horizon, or how a given strategy changes over different time horizons, that's ergodicity.

Ryan
Okay. But before we think of any examples, I know it's a very difficult thing to do, but is it possible to tighten that up even a little bit more without saying what it is? What is ergodicity without giving examples?

Luca
So, ergodicity is the difference between the outcomes of doing an action once and doing it many times.

Ryan
Beautiful. And why does it matter?

Luca
Well, it matters because you might compute the outcome of doing an action once and think that if you repeated x times, you will get x times that amount, which in the real world is just wrong. Very often you will get less than x times that amount. And the study of ergodicity will tell you which actions you need to take to make sure that if you take an action x times, you get as close as possible to getting x times the returns of doing it once.

Ryan
Okay. So in the real world, talk about some of the domains that ergodicity applies to, or at least is most applicable and relevant.

Luca
The usual domains that come to mind are investing and gambling. We see a lot of examples in which if you have to do a gamble once, you will devaluate some gambles as a positive, such as in poker, sometimes it pays on a single gamble to take some risks.

But if you have to repeat the gamble, then you must also think about survival. Because in poker, for example, if your aim is to win a tournament, you cannot take the same amount of risks as if your aim were to win a single hand, to maximize the amount of money in a single hand. The same applies to investments.

Some investments might be a good bet if you're taking the investment once, but they become bad bets if you have to take the investment year over year for 10 or 20 years. And these are, for example, the investments in which there is a chance that you go bankrupt. And the reason is because if you only consider in one year, going like losing the investment means that you lose the money.

And so if you have an investment that has a 50% chance of returning triple the money and 50% chance of going bankrupt, it's a good investment if you take it once, because the average is that you make a 50% return. But if you're taking that investment 10 times,

you will think what you get is 50% compared to 10 years, it goes to I don't know how much like triple or something like that. But in reality, if you take that investment 10 times at some point, you're almost sure that before the 10 years since you will end up bankrupt. And this difference is why it's so important to play your hand, your investments and your life differently if you have a long time horizon.

……. continue the conversation with the podcast here.