4 ms·

I have, the economists completely failed to refute Ole Peters' points. As a Comp Sci PhD I'm telling you Ole Peters is correct.

zwaps 6y ago
As a stats PhD, I am telling you Ole Peters is misunderstanding what EUT is ;-) EUT was developed by von Neumann, someone slightly familiar with ergodicity. It simply is not based on dynamics of out-of-equilibrium systems. Any such thing is an application that adds assumptions to the construct. Ergodicity is an obvious addition in the time domain, it is so obvious that the insight is not even new. However, Peters restricts the problem to a very simple dynamic gamble and then claims that all of economics must be wrong. The very first sentences of Peter's article already get this completely wrong. If you insist on his results, despite the quoted article, the most one can say is that the application of EUT to these problems is questionable. To put it in terms you may be more familiar with. It's like saying that Object Oriented Programming is "wrong", because Python doesn't work for my problem at hand.
- ReflectedImage 6y ago
  Sigh, "Ergodicity is an obvious addition in the time domain" Great, except Ole Peters if you understood his work is adding non-ergodicity. Ole Peters is effectively claiming that static gambles don't exist (outside of utterly bizarre circumstances like parallel universes or co-operatives). The set of problems that you can use EUT on and be correct is almost zero. To simplify: You must always use the Kelly's criteria even for single one-off gambles otherwise you have got the wrong answer. (There are other valid criteria then Kelly's that you could also use but you need to read Ole Peters' paper for them)
  - kgwgk 6y ago
    > The set of problems that you can use EUT on and be correct is almost zero. But his theory is applicable in a strict subset of those...
    - ReflectedImage 6y ago
      No his theory is applicable to a much wider domain. Basically 99.5% of problems that are being solved with EUT should be solved with ergodicity economics. EUT validity is crushed down to the 0.5%.
      - kgwgk 6y ago
        Could you point to one example where a problem is solved and their solution is not equivalent to the choice of an utility function?
      - ReflectedImage 6y ago
        @kgwgk Ahh misread for a second there. Prospect theory is a good example. When calculated using Ole Peters method Prospect theory does not exist.
        deleted 6y ago
        [deleted]
        kgwgk 6y ago
        I don't understand what you mean. Prospect theory tries to solve the problems with EUT. His methods are within the EUT framework. Whatever the problems in EUT that are solved by prospect theory, they also need to be solved in his theory.
        ReflectedImage 6y ago
        His methods are a replacement to the EUT framework. When you attempt to do Prospect theory with Ergonomic Economics you get back the null result: "People behave as rational actors" Rather than the EUT's result of: "Faced with a risky choice leading to gains, individuals are risk-averse (concave value function). Faced with a risky choice leading to losses, individuals are risk-seeking(convex value function)." Basically ergonomics economics shows that Prospect theory is a math's error. This is one of the reasons why Ole Peters work is important.
  - throwaway98797 6y ago
    Kelly maximizes the median outcome, I think. I’ve yet to find an approach that minimize the bottom x percentile. If you’re aware of one I’d love to learn it.
    - hntrader 6y ago
      I think you mean something that maximizes the bottom x percentile (either by making the negative smaller or the positive bigger). It's not going to be an easy solution, because for a sufficiently small x, the optimal strategy for a small number of bets is going to be to bet $0 each time (since the x-th percentile of the terminal outcome will be a loss on capital, or ruin), but the optimal strategy for a large number of bets is going to be to bet > $0 (since the x-th percentile of the terminal outcome will be positive). So we can already see that this is going to be a function of the number of bets, unlike with Kelly, and therefore is going to be a much harder problem.
    - kgwgk 6y ago
      You may find this interesting: https://papers.ssrn.com/sol3/papers.cfm?abstract_id=439400 https://papers.ssrn.com/sol3/papers.cfm?abstract_id=439400 “This paper provides an alternative behavioral foundation for an investor's use of power utility in the objective function and its particular risk aversion parameter. The foundation is grounded in an investor's desire to minimize the objective probability that the growth rate of invested wealth will not exceed an investor-selected target growth rate. Large deviations theory is used to show that this is equivalent to using power utility, with an argument that depends on the investor's target, and a risk aversion parameter determined by maximization. As a result, an investor's risk aversion parameter is not independent of the investment opportunity set, contrary to the standard model assumption.”
- ReflectedImage 6y ago
  "It simply is not based on dynamics of out-of-equilibrium systems" I think that's basically the key point. Ergodicity economics and the real world are both based on dynamic out of equilibrium systems. Where regular economics is not. Real people behave according to ergodicity economics according to Ole Peters study and also the data set used in Prospect's theory.
  - rmbeard 6y ago
    This is also not correct, it depends on which economic model you are looking at. Some assume equilibrium some study transitory dynamics to the equilibrium. You can't make general statements like that and expect them to be always true, you need to refer to a specific model not the field as a whole.
    - ReflectedImage 6y ago
      It's true for Expected Utility Theory and anything that has been based on top of it.
bradleyjg 6y ago
As a Comp Sci PhD I'm telling you Ole Peters is correct. What does being a Comp Sci PhD have to do with anything?
- ReflectedImage 6y ago
  I understand the concept of modelling, something the economists and stats people are completely missing. This is fundamentally a modelling error. They are using valid maths that models the wrong scenario. Consider a group of 1,000,000 people making gambles. In traditional economics a rational actor will make decisions that maximize the SUM of the 1,000,000 rational actors money. In ergodicity economics a rational actor will make decisions that maximize it's money. A subtle distinction, but as a Comp Sci PhD I can tell you that small modelling error has utterly fatal consequences for large parts of economics. Prospect theory for example is written off. Physics PhDs also do modelling. You can see this as a knowledge gap in understanding of a typical economist or stats person, which is why they are having such difficultly in understanding Ole Peters work.
  - bradleyjg 6y ago
    The entirety of two fields don’t understand modeling but luckily we have Computer Science, and of course Physics, PhDs to solve all problems in all fields. You have to be aware of how this comes off, right? This is all tongue in cheek?!? I mean your comment might as well have said “So, why does <your field> need a whole journal, anyway?”
    - ReflectedImage 6y ago
      The maths says they are wrong. There is nothing more to say really. https://www.youtube.com/watch?v=mGBxUNaQI1I https://www.youtube.com/watch?v=mGBxUNaQI1I
      - bradleyjg 6y ago
        In that case why the appeal to your own authority “as a Computer Science PhD” instead of just showing the math? You are trying to have your cake and eat it too—-no credentials matter except your own.

zwaps 6y ago

As a stats PhD, I am telling you Ole Peters is misunderstanding what EUT is ;-) EUT was developed by von Neumann, someone slightly familiar with ergodicity. It simply is not based on dynamics of out-of-equilibrium systems. Any such thing is an application that adds assumptions to the construct. Ergodicity is an obvious addition in the time domain, it is so obvious that the insight is not even new. However, Peters restricts the problem to a very simple dynamic gamble and then claims that all of economics must be wrong. The very first sentences of Peter's article already get this completely wrong. If you insist on his results, despite the quoted article, the most one can say is that the application of EUT to these problems is questionable. To put it in terms you may be more familiar with. It's like saying that Object Oriented Programming is "wrong", because Python doesn't work for my problem at hand.

ReflectedImage 6y ago
Sigh, "Ergodicity is an obvious addition in the time domain" Great, except Ole Peters if you understood his work is adding non-ergodicity. Ole Peters is effectively claiming that static gambles don't exist (outside of utterly bizarre circumstances like parallel universes or co-operatives). The set of problems that you can use EUT on and be correct is almost zero. To simplify: You must always use the Kelly's criteria even for single one-off gambles otherwise you have got the wrong answer. (There are other valid criteria then Kelly's that you could also use but you need to read Ole Peters' paper for them)
- kgwgk 6y ago
  > The set of problems that you can use EUT on and be correct is almost zero. But his theory is applicable in a strict subset of those...
  - ReflectedImage 6y ago
    No his theory is applicable to a much wider domain. Basically 99.5% of problems that are being solved with EUT should be solved with ergodicity economics. EUT validity is crushed down to the 0.5%.
    - kgwgk 6y ago
      Could you point to one example where a problem is solved and their solution is not equivalent to the choice of an utility function?
    - ReflectedImage 6y ago
      @kgwgk Ahh misread for a second there. Prospect theory is a good example. When calculated using Ole Peters method Prospect theory does not exist.
      - deleted 6y ago
        [deleted]
      - kgwgk 6y ago
        I don't understand what you mean. Prospect theory tries to solve the problems with EUT. His methods are within the EUT framework. Whatever the problems in EUT that are solved by prospect theory, they also need to be solved in his theory.
        ReflectedImage 6y ago
        His methods are a replacement to the EUT framework. When you attempt to do Prospect theory with Ergonomic Economics you get back the null result: "People behave as rational actors" Rather than the EUT's result of: "Faced with a risky choice leading to gains, individuals are risk-averse (concave value function). Faced with a risky choice leading to losses, individuals are risk-seeking(convex value function)." Basically ergonomics economics shows that Prospect theory is a math's error. This is one of the reasons why Ole Peters work is important.
- throwaway98797 6y ago
  Kelly maximizes the median outcome, I think. I’ve yet to find an approach that minimize the bottom x percentile. If you’re aware of one I’d love to learn it.
  - hntrader 6y ago
    I think you mean something that maximizes the bottom x percentile (either by making the negative smaller or the positive bigger). It's not going to be an easy solution, because for a sufficiently small x, the optimal strategy for a small number of bets is going to be to bet $0 each time (since the x-th percentile of the terminal outcome will be a loss on capital, or ruin), but the optimal strategy for a large number of bets is going to be to bet > $0 (since the x-th percentile of the terminal outcome will be positive). So we can already see that this is going to be a function of the number of bets, unlike with Kelly, and therefore is going to be a much harder problem.
  - kgwgk 6y ago
    You may find this interesting: https://papers.ssrn.com/sol3/papers.cfm?abstract_id=439400 https://papers.ssrn.com/sol3/papers.cfm?abstract_id=439400 “This paper provides an alternative behavioral foundation for an investor's use of power utility in the objective function and its particular risk aversion parameter. The foundation is grounded in an investor's desire to minimize the objective probability that the growth rate of invested wealth will not exceed an investor-selected target growth rate. Large deviations theory is used to show that this is equivalent to using power utility, with an argument that depends on the investor's target, and a risk aversion parameter determined by maximization. As a result, an investor's risk aversion parameter is not independent of the investment opportunity set, contrary to the standard model assumption.”
ReflectedImage 6y ago
"It simply is not based on dynamics of out-of-equilibrium systems" I think that's basically the key point. Ergodicity economics and the real world are both based on dynamic out of equilibrium systems. Where regular economics is not. Real people behave according to ergodicity economics according to Ole Peters study and also the data set used in Prospect's theory.
- rmbeard 6y ago
  This is also not correct, it depends on which economic model you are looking at. Some assume equilibrium some study transitory dynamics to the equilibrium. You can't make general statements like that and expect them to be always true, you need to refer to a specific model not the field as a whole.
  - ReflectedImage 6y ago
    It's true for Expected Utility Theory and anything that has been based on top of it.

bradleyjg 6y ago

As a Comp Sci PhD I'm telling you Ole Peters is correct. What does being a Comp Sci PhD have to do with anything?

ReflectedImage 6y ago
I understand the concept of modelling, something the economists and stats people are completely missing. This is fundamentally a modelling error. They are using valid maths that models the wrong scenario. Consider a group of 1,000,000 people making gambles. In traditional economics a rational actor will make decisions that maximize the SUM of the 1,000,000 rational actors money. In ergodicity economics a rational actor will make decisions that maximize it's money. A subtle distinction, but as a Comp Sci PhD I can tell you that small modelling error has utterly fatal consequences for large parts of economics. Prospect theory for example is written off. Physics PhDs also do modelling. You can see this as a knowledge gap in understanding of a typical economist or stats person, which is why they are having such difficultly in understanding Ole Peters work.
- bradleyjg 6y ago
  The entirety of two fields don’t understand modeling but luckily we have Computer Science, and of course Physics, PhDs to solve all problems in all fields. You have to be aware of how this comes off, right? This is all tongue in cheek?!? I mean your comment might as well have said “So, why does <your field> need a whole journal, anyway?”
  - ReflectedImage 6y ago
    The maths says they are wrong. There is nothing more to say really. https://www.youtube.com/watch?v=mGBxUNaQI1I https://www.youtube.com/watch?v=mGBxUNaQI1I
    - bradleyjg 6y ago
      In that case why the appeal to your own authority “as a Computer Science PhD” instead of just showing the math? You are trying to have your cake and eat it too—-no credentials matter except your own.