What is the *ergodic assumption*? And why is it important for understanding finance and economics?

Mainstream economic theory presumes that people who make decisions will make the best decisions regarding their income and capital if those decisions payoff in future outcomes. However, in order to make the best decisions, these deciders must somehow ‘know’ the future outcome of all the possibilities they might have to choose from. But how can one ‘know’ the future? In order to make statistically reliable estimates about future outcomes the decision makers must be able to draw a sample from the future and then calculate the probability of the outcomes. This is impossible.

So what do mainstream economists do when confronted with this impossibility? Axiomatize it! An axiom is a proposition that is not and cannot be proven within the system based on it. The erogodic axiom states that all economic events—past, present and future—are all determined by a pre-existing and unchanging probability distribution. This essentially means that the mainstream ergodic axiom presumes that data samples from the past are equivalent to drawing data samples from the future. Therefore the future is readily ‘knowable’ and decision makers will not make any mistakes, ever. The ergodic axiom is the basis of the ‘laissez-faire’ ideology that underlies mainstream economics.[1]

[1] However, it should be noted that risk management computer models used by large financial institutions such as Goldman Sachs, Lehman Brothers, etc. involved calculations of risk probabilities based on past financial market data to warn management about the future risks of any decision regarding future portfolio changes. Though these models obviously failed to warn these large financial institutions of the financial crash of 2007-2008. The result was that government had to bail out these large financial institutions in order to prevent a bigger economic disaster from occurring.

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