Reply to "The Limitations of Growth-Optimal Approaches to Decision Making Under Uncertainty"

Oliver Hulme, Arne Vanhoyweghen, Colm Connaughton, Ole Peters, Simon Steinkamp, Alexander Adamou, Dominik Baumann, Vincent Ginis, Bert Verbruggen, James Price and Benjamin Skjold

Econ Journal Watch, 2023, vol. 20, issue 2, 335–348

Abstract: In an article appearing concurrently with the present one, Matthew Ford and John Kay put forward their understanding of a decision theory which emerges in ergodicity economics. Their understanding leads them to believe that ergodicity economics evades the core problem of decisions under uncertainty and operates solely in a regime where there is no measurable uncertainty. If this were the case, then the authors’ critical stance would be justified and, as the authors point out, the decision theory would yield only trivial results, identical to a flavor of expected-utility theory. Here we clarify that the critique is based on a theoretical misunderstanding, and that uncertainty—quantified in any reasonable way—is large in the regime where the model operates. Our resolution explains the success of recent laboratory experiments, where ergodicity economics makes predictions different from expected-utility theory, contrary to the claim of equivalence by Ford and Kay. Also, a state of the world is identified where ergodicity economics outperforms expected-utility theory empirically.

Keywords: Ergodicity economics; stochastic process; random variable; expected utility theory; experiments; random walks (search for similar items in EconPapers)
JEL-codes: C01 C11 C12 C22 C52 C61 C73 C91 D01 D81 D84 G11 (search for similar items in EconPapers)
Date: 2023
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Persistent link: https://EconPapers.repec.org/RePEc:ejw:journl:v:20:y:2023:i:2:p:335-348

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