Seminar in applied mathematics and statistics

SPEAKER:  Ollie Hulme (DRCMR, Hvidovre Hospital).

TITLE: Ergodicity and decision making under risk.

ABSTRACT: Ergodicity describes an equivalence between the expectation value and the time average of observables. Applied to human behaviour, ergodic theory reveals how individuals should tolerate risk in different environments. To optimise wealth over time, agents should adapt their utility function according to the dynamical setting they face. Linear utility is optimal for additive dynamics, whereas logarithmic utility is optimal for multiplicative dynamics. Whether humans approximate time optimal behavior across different dynamics is unknown. In this talk I will present data that compare the effects of additive versus multiplicative gamble dynamics on risky choice. I will argue that the utility functions observed are modulated by gamble dynamics in ways not explained by prevailing economic theory. Instead, as predicted by time optimality, risk aversion increases under multiplicative dynamics, distributing close to the values that maximise the time average growth of wealth. I suggest that our findings motivate a need for explicitly grounding theories of decision-making on ergodic considerations.


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