Luca Dellanna | Ergodicity & It's Role In Taleb's Incerto
Oct 4, 2023
auto_awesome
Luca Dellanna, author and independent consultant, discusses the concept of ergodicity and its relevance in decision-making. Topics include fat tails and power laws, consultants lacking personal stakes, achieving big impacts with minimal risks, the power of compounding, collecting data, taking daily losses, and the role of serendipity in uncertain professions.
Ergodicity reminds us to consider the long-term implications of our decisions and adapt our strategies accordingly in domains like investing and gambling.
Understanding ergodicity reminds us to prioritize sustainability and balance our ambitions with an awareness of the impact over time, even in careers and fitness.
Recognizing the limitations of relying solely on skill and acknowledging the role of luck allows for more informed decisions and increases the chances of long-term success.
Deep dives
Ergodicity: The Study of Time Horizons
Ergodicity is the study of the effect of time horizons on decisions and strategies. In the real world, there is no one optimal strategyâit depends on the specific time horizon. For example, investing and gambling are domains where ergodicity applies. What might be a good bet or strategy in the short term may not hold up over time, considering factors like survival and bankruptcy risk. Ergodicity reminds us to consider the long-term implications of our decisions and the need to adapt our strategies accordingly.
The Importance of Long-Term Thinking
Ergodicity matters in various domains, even for individuals who are not investors or gamblers. In careers, working hard in the short term may seem beneficial, but over the long term, it can lead to burnout and negative consequences for relationships and health. Similarly, in fitness or sports, pushing ourselves to the limits in every session may yield immediate gains but increases the risk of injury and setbacks in the long term. Understanding ergodicity reminds us to prioritize sustainability and balance our ambitions with an awareness of the impact over time.
The Role of Luck and Skill in Success
Ergodicity illuminates the role of luck and skill in success. Luck plays a significant part in outcomes, even for highly skilled individuals. Using examples like Elon Musk, it is clear that luck can heavily influence wealth and success beyond one's skills and efforts. Aiming for top 1% or top 5% instead of striving to be number one allows for a better balance between ambition and risk. By recognizing the limitations of relying solely on skill, one can make more informed decisions, manage expectations, and increase the chances of long-term success.
The Importance of Agoddicity in Insurance
Agoddicity explains the overlap between the prices an insured person is willing to pay and the prices an insurance company is willing to accept. For example, if a house is valued at 1 million euros with a 1% chance of burning, the insured person would want to pay a maximum of 10,000 euros for insurance. However, for the insurance company, it doesn't make sense to offer coverage for less than 10,000 euros. Agoddicity helps to understand why there is an overlap in prices, as the individual cannot survive the loss of their home, while the insurance company insures multiple houses and can survive the loss of one.
The Importance of Long-Term Thinking and Compounding
Long-term thinking and compounding play significant roles in various domains. It is not necessary to be in the top 1% every single day, but rather consistently perform at a high level over time. Taking exceptional risks for short-term gains can lead to failure in the long run. For example, in professional skiing, being the fastest skier in one race is not enough for long-term success. Consistency and avoiding ruin are more important factors. The same principle applies in cricket, where a batsman who prioritizes not getting out and accumulating runs over time is likely to have a more successful career than one who constantly takes risks for quick runs.
The following is with the debut Italian on this podcast, the one and only Luca Dellanna.
Luca is the extremely successful author of 9 books, and he writes these alongside his day job, as an independent consultant advising businesses across the world at the intersection of risk and behavioural psychology
This makes him the best communicator of the subject of todays conversation, which funnily enough is the very same title of most recent book... Ergodicity.
Time Stamps For Luca Dellanna
00:00 â Introduction
01:23 â What Is Ergodicity?
05:53 - Why Does Ergodicity Matter?
15:23 - Fat Tails & Power Laws
22:43 - Consultants & Skin In The Game
29:50 - Ole Peters & Ergodicity In Insurance
39:58 - The Perfect Example To Explain Ergodicity + My Attempt At Applying Ergodicity To Cricket
48:31 - Behavioural Change Is Non Ergodic
51:35 - Kelly Criterion In Nature + Survivorship Bias & Lindy
