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The time interpretation of expected utility theory
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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.
Forward citations
Cited by 2 Pith papers
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Beyond expected value: geometric mean optimization for long-term policy performance in reinforcement learning
The paper introduces a modified geometric mean regularizer for multi-step Q-learning and claims it captures time-average growth, but the key theoretical and empirical supports are weak.
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Behavioral Biases and Nonadditive Dynamics in Risk Taking: An Experimental Investigation
Using three extreme-outcome gambling problems, the paper finds that most people prefer the certain option and argues that time-averaged wealth growth, not expected value, drives these choices.
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