2018/01/11 by Ole Peters, Peters, Ole, Alexander Adamou +1 · 1 citation
Decision Sciences · Economics, Econometrics and Finance · Mathematics · #Class (philosophy) #Complex Systems and Time Series Analysis #Computer science #Decision-Making and Behavioral Economics #Econometrics #Economic theories and models #Economics #Ergodic theory #Ergodicity #Expected utility hypothesis #FOS: Economics and business #Function (biology) #General Economics (econ.GN) #Interpretation (philosophy) #Mathematical economics #Mathematics #Multiplicative function #Observable #Pure mathematics #Statistics #Subjective expected utility #Transformation (genetics)
paper · pdf · doi:10.48550/arxiv.1801.03680
openalex publication_date 2018/01/11 · openalex created_date 2025/10/10 · openalex updated_date 2026/08/05
Ergodicity economics is a new branch of economic theory that notes the conceptual difference between time averages and expectation values, which coincide only for ergodic observables. It postulates that individual agents maximise the time average growth rate of wealth, known widely as growth optimality. This contrasts with the dominant behavioural model in economics, expected utility theory, in which agents maximise expectation values of changes in psychologically transformed wealth. Historically, growth optimality was explored for additive and multiplicative gambles. Here we apply it to a general class of wealth dynamics, extending the range of economic situations where it may be used. Moreover, we show a correspondence between growth optimality and expected utility theory, in which the ergodicity transformation in the former is identified as the utility function in the latter. This correspondence offers a theoretical basis for choosing utility functions and predicts that wealth dynamics are strong determinants of risk preferences.