Probability weighting and Ergodicity Economics

Probability weighting and Ergodicity Economics

One key observation that helped launch the field of behavioral economics into stardom is called probability weighting: a human cognitive bias to assign higher probabilities to extreme events than … well, than what? Than what someone else thinks the probabilities should be. Below, I will present a very simple mechanistic explanation, most of all for the iconic probability weighting figure in (Tversky and Kahneman, 1992). The result is a now familiar theme: (behavioral) economics expresses a more or less robust observation in psychological terms, as a persistent cognitive error. Ergodicity economics explains the same observation mechanistically, and as perfectly rational behavior.

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Democratic domestic product

Democratic domestic product

Over the years, some words have established themselves at the London Mathematical Laboratory as a useful vocabulary. “Laplacing something” and “Weltschmerz” (p.32) are among these words. Another is “Democratic Domestic Product” or DDP — a humorous term, like all the others, that reflects the first response a student trained in ergodicity economics will have when confronted with Gross Domestic Product (GDP).

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