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(1) their insight is not novel, they have independently reinvented Something that started with the Kelly Criterion https://en.m.wikipedia.org/wiki/Kelly_crite

(1) their insight is not novel, they have independently reinvented Something that started with the Kelly Criterion https://en.m.wikipedia.org/wiki/Kelly_criterion https://en.m.wikipedia.org/wiki/Kelly_criterion (2) Expected utility theory makes no assumptions about ergodicity. In intertemporal setting, portfolio allocations maximising expected utility will chose something close to their metric as well as giving some insight into the split between investment and consumption. https://en.m.wikipedia.org/wiki/Intertemporal_choice https://en.m.wikipedia.org/wiki/Intertemporal_choice (3) with intertemporal analysis, the rate of discounting is important. This has been heavily discussed by economists and philosophers already. If you don't have heavy discounting, the future becomes much more important relative to the present than would be consistent with many people and government's actions.

juskrey 6y ago
Kelly here is the only way which is addressing the ruin, other two are (bad) tricks around initially wrong assumptions
- kgwgk 6y ago
  Their result is not an alternative to expected utility maximization. It is expected (logarithmic) utility maximization.
- hntrader 6y ago
  In practice, utility theory works well. Poker players adopt a utility function similar to u(x)=x and apply some very basic risk management heuristics (bankroll management) on top in order to handle ergodicity. Their whole thought process is centred on E[u(x)] (E[x]), and they have much more affinity for expected utility theory than the more "correct" Kelly. Professional investors adopt a slightly risk-averse u(x) (not quite ln(x) in my experience) and do just fine with that. Risk of ruin is managed again using simple practical heuristics, such as capping the maximum downside on each decision, and sizing up only when confident (in Kelly-like fashion - but very subjective). That it doesn't explicitly handle ergodicity isn't a huge flaw in practice. It's still a useful (although imperfect) mental model of what's going on in people's brains and offers some practical usefulness. It's also not a wrong assumption technically, because it's not claiming to model such phenomena, its claim is to model the utility of a single discrete choice.
  - ReflectedImage 6y ago
    There are some nasty side effects of EUT through. Prospect theory for example shouldn't exist (when you handle the non-ergodicity part of the problem properly the theory vanishes into thin air). EUT + Hacks works but anything built upon of EUT is subject to sudden collapse due to unstable foundations. Ergonomic economics is able putting down stable foundations that other theories can be built upon of.
    - deleted 6y ago
      [deleted]
    - hntrader 6y ago
      EUT should be adjusted to handle ergodicity properly. But the concept of expected utility needs to be the centrepiece of the theory. Kelly, for example, is fatally flawed because it ignores utility: (1) Ruin isn't an absorbing state in most contexts, due to bankrupticy laws, limited liability, relationships, and so on. Ruin is an absorbing state in other contexts. Only utility can capture this difference. (2) Implementing Kelly requires the emotional fortitude of a rock. In practice, it becomes a losing strategy since the practitioner will collapse emotionally and make bad decisions whenever the distribution of the outcome is unknown. (3) Implementing Kelly forgets that investors will redeem capital if the downswing is too severe for them. (4) etc. Only a conceptual framework built around expected utility as a bedrock principle can handle these practical realities, and moreover capture those practical realities empirically.
      - ReflectedImage 6y ago
        "expected utility needs to be the centrepiece of the theory" Fundamentally expected utility is wrong. Kellys is fatally flawed as it's merely one of a whole class of functions that be used, where Kellys happens to be on the aggressive side of things. Ole Peters gives the entire class of the functions that can be used. There is obviously a whole band of less to more aggressive options you can take.
        6y ago
kgwgk 6y ago
They don't have to deal with intertemporal substitution because their model doesn't consider consumption at all. They care only about the limit of the rate of growth when the horizon grows. It's effectively a single (infinite) period model. At best, they just repeat a well-known argument supporting logarithmic utility. It's just a special case within the expected utility framework.
kgwgk 6y ago
> they have independently reinvented I'm not sure it's fair to say "independently reinvented". They know the previous work, at least some of it. Their contribution is to add the word "ergodic" here and there and tell the reader that "Growth rate optimization is now sometimes called ‘ergodicity economics’".

juskrey 6y ago

Kelly here is the only way which is addressing the ruin, other two are (bad) tricks around initially wrong assumptions

kgwgk 6y ago
Their result is not an alternative to expected utility maximization. It is expected (logarithmic) utility maximization.
hntrader 6y ago
In practice, utility theory works well. Poker players adopt a utility function similar to u(x)=x and apply some very basic risk management heuristics (bankroll management) on top in order to handle ergodicity. Their whole thought process is centred on E[u(x)] (E[x]), and they have much more affinity for expected utility theory than the more "correct" Kelly. Professional investors adopt a slightly risk-averse u(x) (not quite ln(x) in my experience) and do just fine with that. Risk of ruin is managed again using simple practical heuristics, such as capping the maximum downside on each decision, and sizing up only when confident (in Kelly-like fashion - but very subjective). That it doesn't explicitly handle ergodicity isn't a huge flaw in practice. It's still a useful (although imperfect) mental model of what's going on in people's brains and offers some practical usefulness. It's also not a wrong assumption technically, because it's not claiming to model such phenomena, its claim is to model the utility of a single discrete choice.
- ReflectedImage 6y ago
  There are some nasty side effects of EUT through. Prospect theory for example shouldn't exist (when you handle the non-ergodicity part of the problem properly the theory vanishes into thin air). EUT + Hacks works but anything built upon of EUT is subject to sudden collapse due to unstable foundations. Ergonomic economics is able putting down stable foundations that other theories can be built upon of.
  - deleted 6y ago
    [deleted]
  - hntrader 6y ago
    EUT should be adjusted to handle ergodicity properly. But the concept of expected utility needs to be the centrepiece of the theory. Kelly, for example, is fatally flawed because it ignores utility: (1) Ruin isn't an absorbing state in most contexts, due to bankrupticy laws, limited liability, relationships, and so on. Ruin is an absorbing state in other contexts. Only utility can capture this difference. (2) Implementing Kelly requires the emotional fortitude of a rock. In practice, it becomes a losing strategy since the practitioner will collapse emotionally and make bad decisions whenever the distribution of the outcome is unknown. (3) Implementing Kelly forgets that investors will redeem capital if the downswing is too severe for them. (4) etc. Only a conceptual framework built around expected utility as a bedrock principle can handle these practical realities, and moreover capture those practical realities empirically.
    - ReflectedImage 6y ago
      "expected utility needs to be the centrepiece of the theory" Fundamentally expected utility is wrong. Kellys is fatally flawed as it's merely one of a whole class of functions that be used, where Kellys happens to be on the aggressive side of things. Ole Peters gives the entire class of the functions that can be used. There is obviously a whole band of less to more aggressive options you can take.
      - 6y ago

kgwgk 6y ago

They don't have to deal with intertemporal substitution because their model doesn't consider consumption at all. They care only about the limit of the rate of growth when the horizon grows. It's effectively a single (infinite) period model. At best, they just repeat a well-known argument supporting logarithmic utility. It's just a special case within the expected utility framework.

kgwgk 6y ago

> they have independently reinvented I'm not sure it's fair to say "independently reinvented". They know the previous work, at least some of it. Their contribution is to add the word "ergodic" here and there and tell the reader that "Growth rate optimization is now sometimes called ‘ergodicity economics’".