Ergodicity

The fastest racers in the world, didn’t get there because they were the fastest. They got there because they were the fastest of those who didn’t get injured into retirement. In skiing, and life in general, it is not the best ones who succeed. It is the best ones of those who survive. Big Ideas

In theory, performance determines success. The fastest skier wins the race, and the most performing employee becomes the most successful one. In practice, performance is subordinate to survival. It is the fastest racer of those who survive that wins races, it is the most performing employee who doesn’t burn out that becomes the most successful, and so on.

In a single instant of time, pure performance is all that matters. Instead, over a prolonged period of time, survival dwarfs performance.

There is a difference between what matters when we consider narrow intervals and what does when we consider broader ones. Over the short term, consequences that apply beyond the short-term do not matter. Over the long term, they do.

Irreversibility absorbs future gains. This means that you cannot extrapolate future outcomes from solely the expected outcomes of the activity performed once.

Maximize growth that conserves survival.

Distinguish between calculated risks whose consequences you can recover from and recklessness whose consequences might permanently debilitate you. There is a sweet spot where you expose yourself to the former but not the latter.

The fewer the flips, the higher the chances that the tally differs from the expected 50%. We notice that the average of observed results converges to the expected value as a larger number of trials is performed. This is called the law of large numbers. Law of Large Number

I cannot keep picking risky stocks until I get rich – a few bad results in a row, and I am broke. Whenever an activity cannot be assumed repeatable at infinity, we should be wary of expecting to achieve its average outcome.

Any form of “game-over” nullifies future gains, bringing the average down. Ergodicity

In Russian Roulette, the outcome you get by playing it a few times is different from the average outcome of a few people playing it once.

A system is ergodic if the lifetime outcome corresponds to the population outcome for all its components. Otherwise, it is non-ergodic. Ergodicity

Ergodicity is verified if, more or less, every time that you compute a statistical measurement (across space or time), you find the same result. It means that randomness is “well shared.” Another way to see it is that, when you have ergodicity, doing N random experiments in parallel will give you the same result as doing N experiments one after the other. Randomness

In ergodic systems, you can use the population outcome to make optimal decisions. In non-ergodic systems, you cannot. Ergodicity

For example, Russian Roulette is non-ergodic because the lifetime outcome differs from the population outcome. If you decide to keep playing it because you fail to grasp its non-ergodicity and mistakenly believe that your lifetime outcome equals your population one, you will end up dead. Ergodicity

Here is a game. You flip a coin. If it’s heads, I give you $1000. If it’s tails, you give me $950. Do you want to participate? On average, every time you play the game, you’re expected to win $25. This makes the gamble apparently desirable. For real people, the limitation on the number of times they can play can transform their lifetime outcome of a gamble to negative. Ergodicity

The Ludic Fallacy: The mistake of neglecting the payoffs that are external to the gamble at play. For example, if you ever played boardgames, you might have noticed that only a few players play to win. Some play to have fun, and others to strengthen social bonds. Their moves might seem irrational, for they have sub-optimal payoffs inside the game. However, including the payoffs outside the game is enough to make their moves rational.

AngelList founder Naval Ravikant wisely notes that envy is most often an illusion. “The part of the person that we envy doesn’t exist without the rest of that person,” he writes. “If we aren’t willing to trade places with them completely – their life, their body, their thoughts – then there is nothing to be envious about.” Envy

It is pointless to envy someone with whom you wouldn’t trade places in all parallel universes – including those in which his gambles didn’t pay off. Do you desire to take his gambles, or do you only desire the winning outcome? Do not envy the survivors of ventures in which you didn’t participate. Envy Universe Survivorship Bias

Whenever we desire an outcome because we see those that benefited from it, it is good practice asking yourself, do you want the outcome, or do you want the opportunity to take the gamble that produced the outcome? If you only want the former but not the latter, you might be unprepared for what’s to come.

Irreversibility absorbs future gains.

The population outcome is the outcome of many people performing an action once. The lifetime outcome is the outcome of one person performing an action many times. Ergodicity

If the population and lifetime outcomes differ, the system that produces them is non-ergodic. Ergodicity

You can only rely on expected outcomes if you are guaranteed a large number of repetitions. Otherwise, they are misleading (the law of large numbers requires a large number of repetitions). Law of Large Number

Risk aversion is rational in the presence of non-ergodicity.

A system can work well on average and still fail locally.

The law of large numbers says that, as the number of trials increases, the average outcome converges to the expected one. We saw that this applies to ergodic contexts only. In non-ergodic ones, irreversibility limits the number of trials, thus preventing the law of large numbers from applying. Law of Large Number Ergodicity

As an individual, you do not care whether the system works on average. You care if it works for you.

Averages hide local spikes in irreversibility; survival is based on the local. Localism

This tension between what happens on average and what happens locally is the main problem of centralization. Centralized organizations must rely on averages. They cannot make thousands of micro-decisions, each appropriate for a given corner of the world. They must take a single, one-fits-all decision. Even if these decisions work on average, they might have a terrible impact on some local populations. Centralized organizations make more sense in an ergodic world than in a non-ergodic one. Centralization

Centralization is only efficient to the central observer. Centralization

Be wary of centralization, especially when there is no skin in the game ensuring that the incentives of the center coincide with those of the peripheries. Centralization Skin in the Game

A major problem of centralization is the lack of granularity. A central government cannot possibly review granular data and cannot enact policies that are granular enough to be effective everywhere. Instead, we get one-fits-all. Hence the importance of bringing down decision making closer to the people involved. For example, if a decision can be taken at the province or state level, it should be taken at the province level. Localism Centralization

We cannot rely on averages whenever there is a possibility for irreversible damage . This is because the possibility of irreversible damage makes a context non-ergodic. Average Ergodicity

When we consider averages, the good offsets the bad. However, for individuals, something good happening to someone else doesn’t offset the bad that happened to them.

When losses are irreversible, or when losses preclude future gains, do not decide based on averages. Average Ergodicity

The best strategy depends on whether you are the gambler or the gamble. If you are the gambler, you do not care about each gamble making money. You care about the aggregate of all gambles making money. Conversely, if you are the gamble (in this example, the founder), you do not care about the overall outcome of all gambles but only yours.

Each of your habits is a gamble in which you bet time and energy for a possible return. Habits

For an employee, his career and health are irreplaceable, but for the company, most employees are replaceable.

For a mother, her child is irreplaceable. Instead, for the species, natural selection means an improvement.

The survival of the population doesn’t coincide with the survival of all its members – as is the case in non-ergodic conditions –, a well-meaning population won’t necessarily guarantee the survival of all its members. It won’t do so when it comes to the cost of its own survival. Ergodicity

For a company or a population, replaceability of its members means ergodicity. For the individual members, the opposite applies. Ergodicity

As an individual, you cannot blindly rely on membership of a group for your survival.

Natural selection benefits populations. This is good news if you are a population and bad news if you are one of its weak members. In the latter case, you can turn the tables by making natural selection work for you rather than against you. The trick is to become a population yourself. This is easier than it seems. After all, you already are a population: of habits and beliefs. If you let the feedback you receive from your environment hurt the habits and beliefs that are holding you back, you are effectively making natural selection act inside you rather than on you. You become stronger rather than extinct. You are not your habits nor your beliefs. You are their container. Their survival is not yours. What’s best for them might or might not be what’s best for you. Natural Selection Charles Darwin Big Ideas Beliefs

The three “paradoxes” of non-ergodicity.Ergodicity

All three assertions only apply to non-ergodic contexts. Hence the importance of understanding ergodicity. Whether you are in an ergodic world or not determines what is rational and what isn’t. World Ergodicity Ergodicity

A healthcare system can work on average and still fail locally. This is because those who died do not resuscitate once a hospital works again. Death is a form of game-over: it nullifies any future gain.

Game-overs bring non-ergodicity. Ergodicity

Irreversibility brings non-ergodicity.

After the game-over, you cannot keep playing. Game-overs are a form of irreversibility, but they are not the only one. Ergodicity

Here is a simple test to spot non-ergodic situations. “Are there irreversible consequences?” If yes, it is non-ergodic. Ergodicity

Instead of going all-in on a single bet, take many independent bets. Make sure that they are really independent, though!

Set aside some buffers and reserves (of money, time, trust, etc.) so that even if you lose everything you used, you still have some to recover.

In practice, however, most practical contexts are non-ergodic. Work, sports, relationships, and real life are all non-ergodic. They all contain some degree of irreversibility. Ergodicity

It becomes then useful to expand the concept of ergodicity from black and white to a scale of shades. This way, we can access more practical considerations such as “how can I make my business more ergodic?” Ergodicity

The problem with non-ergodicity: it causes your lifetime outcome to be worse than the expected one. Ergodicity

In investing, the barbell strategy consists of allocating part of one’s wealth in non-risky assets and part in risky ones with high upside (the asymmetry being reminiscent of a barbell). Investors who do so find themselves wealthier than those investing all their wealth in medium-risk assets. Barbell Strategy Investment

The barbell strategy consists of exposing most of yourself to safe activities and a tiny bit of yourself to risky ones with high upside. Barbell Strategy Investment

The point of the barbell strategy is to pursue risky activities in a way that caps downside. By reducing the amount exposed to risk, it prevents a single loss, or a short series of losses, from constituting a game-over. What matters is that you can afford small risky bets for longer. Barbell Strategy Investment

The Barbell Strategy is about limiting the part of yourself or of your assets that are exposed to irreversibility. Barbell Strategy

The Barbell Strategy is about limiting exposure so that the worst-case scenario doesn’t endanger your survival. Barbell Strategy

Risk exposure must depend on payoffs and, anyway, be limited. Risk

The Kelly Criterion Formula Kelly Criterion

If I invested all my time for the next three years on a single project or client, I would be in a terrible condition in case of failure. Instead, I allocate my time on a per-project basis. Usually, the larger the upside, the more time I spend on the project.

The first strategy to apply is to make sure that you never go all-in in any activity that might represent a game-over for you in case of misfortune.

This is distinct from never taking any risks. Just take them with a limited exposure – for example, by investing just a little. The Kelly Criterion helped you understand how to modulate your bets better. Kelly Criterion

As seen in the Barbell strategy, this is distinct from never taking any risks. Just take them with a limited exposure – for example, by investing just a little. The Kelly Criterion helped you understand how to modulate your bets better. Kelly Criterion Barbell Strategy Risk

The Precautionary Principle guides us in risk management decisions. It begins by acknowledging that there are two kinds of risks: those that endanger the whole (a population, an ecosystem, the planet) and those that do not. Precautionary Principle Mental Models

The Precautionary Principle holds that we should not take risks that endanger the whole, no matter how unlikely. If we keep taking them, we are guaranteed to blow up (remember the Russian Roulette player?). Precautionary Principle

Do not expose the whole to irreversibility, no matter how attractive the payoffs. Ergodicity

In nature, those who are fit thrive, and the unfit perish. Natural selection is a cruel yet essential phenomenon. Natural Selection

An organization that never fires a single employee becomes uncompetitive. Natural selection at the level of the industry will make the company fail. Therefore, to avoid becoming a victim of natural selection, a company must make it act on its employees, at least in a measure. Natural selection is inevitable for companies, but they can decide whether it acts on them or within them. Natural Selection

The solution is to realize that natural selection, while inevitable, can be further pushed down to lower levels. Just like companies can protect themselves by firing their unfit employees, employees can protect themselves by firing their unfit mental patterns. To protect the individual, natural selection must be free to act within the individual. There, it can select the beliefs and habits of his or hers that are fit (i.e., beneficial) and terminate those that are unfit (i.e., hinder his or her performance). This is fractalization. The name comes from the realization that natural selection acts across levels with a fractal-like pattern. Just as it acts within a market by selecting companies, it acts within companies selecting employees, within individuals selecting beliefsNatural Selection Fractalization Improvement Big Ideas Fractal

Markets are made of businesses, businesses of employees, and employees of beliefs and habits. Natural selection is inevitable, but we can avoid it at any given level by pushing it towards a lower one (in some measure). Natural Selection Big Ideas

You, too, can take advantage of natural selection. Remember: whenever it encounters a population, it “kills” some of its members. Therefore, you can become stronger by making yourself a population – of habits and beliefs – and getting rid of the unfit ones. Even though your ego wants to save them. Natural Selection Big Ideas Improvement

If you want to survive, do not identify with your habits and beliefs but with their container. This way, you will let natural selection remove the habits and beliefs that are holding you down. You will get stronger, thus less likely to become the victim of natural selection yourself. Natural Selection Big Ideas Improvement

Fractalization and other forms of adaptation become dangerous if one over-exposes him- or herself to stimuli and selective pressures which are not representative of the long-term environment. For example, someone giving too much weight to his boss’ feedback which is fully based on short-term results. Fractalization

Leading indicators represent long-term requirements, lagging indicators represent short-term requirements. KPIs

The first strategy to manage non-ergodicity is to reduce your exposure to irreversibility:

How to apply the first strategy?

Decision-makers who can take short-termed decisions without being affected by their long-term consequences take excessive risks. This condition is called moral hazard. Moral hazard happens when someone has incentives to increase an entity’s exposure to risk because he won’t bear the full cost of that risk. The condition of suffering the consequences of one’s actions, skin in the game, is the opposite of moral hazard. It incentivizes people to make decisions that are good for them and others. As such, it helps protecting populations. Risk Moral Hazard Skin in the Game Nassim Taleb

It is not incentives that provide skin in the game, but irreversibility. Skin in the Game Incentives

No one can neglect irreversibility.

A population can decrease its exposure to irreversibility by exposing its members to it. Whether irreversibility has a positive or negative effect depends on the layer observed.

Skin in the game prevents dangerous individuals from hurting others. It does so in two ways. First, it incentivizes them not to do anything dangerous. Second, if they do, it prevents them from doing it again. Skin in the Game

Skin in the game prevents dangerous or ineffective behaviors from spreading. It ensures that frauds, charlatans, and incompetents are quickly filtered out of the pool of experts that people imitate. Skin in the Game Mimetic

Be wary of advice from people without skin in the game. Life

Bulletproof jackets work by dispersing the load from the bullet hitting them across a large surface.

Systems that can instantaneously share load are more ergodic than those that cannot, all other things equal. For them, the local and the average are the same. Ergodicity

A good friend of mine recently purchased a car. He chose to pay it in monthly installments over five years. He did so even though he had the financial availability to pay it cash. He explained that it allowed him to keep a buffer of money in the bank, to manage unexpected problems. If he paid the car cash and lost his job next month, he would be in dire straits. He decided to prioritize survival over optimization, the unexpected over the expected. A clueless economist might call irrational the choice to pay something more, when you have the option to pay it less. Temporal distribution matters.

Pre-emptive redistribution increases resilience.

In mechanics, the inability to redistribute loads is called brittleness. Brittle materials, such as ceramic, break easily. This is because they cannot redistribute load spikes over their surface. A small hit, and they break.

AWS is a multibillion business based on the idea of selling computers that can “deform” and expand their computing capacity when they receive load above average.

The point is, to avoid breaking down, don’t be brittle. Deform to accommodate your loads.

It is not the average that matters, but the local. Local spikes require local buffers.

Redistributing loads helps to prevent irreversible losses, redistribution of unexpected loads requires buffers or a local capacity to deform.

In a non-ergodic world, you often benefit from redistribution, even if you’re giving more than you’re receiving. Ergodicity

There are two types of irreversibility:

Redistribution helps mitigate both types of irreversibility. For example, unemployment benefits help avoid personal bankruptcy.

Populations want most of their members to survive, not just their fitter ones. This is for three reasons. One, we are humans. Two, numbers bring strength. Three, numbers bring variance, and variance is important. As environments change and predators or competitors evolve, the traits required for thriving vary too. One day, the tribe might need someone strong. Another day, it might need someone smart. It is wise to preserve the smart even when his skills are not needed.

What is optimal to win a single race is not optimal to win a championship. Ergodicity

The easiest way to increase performance is to narrow the time frame over which it is measured. Sadly, it is also the easiest way to produce unsustainable performance. Performance Ergodicity Improvement

If you want to be a fast skier, it’s very easy. Just keep your skis straight, your knees bent, and go down the slope as straight as possible. You will have a hard time avoiding a crash, but for a few seconds, you will be fast. Everyone can be fast. The hard part is being fast while retaining control. The hard part is to be fast in the short term and the long term. Performance Improvement

The easiest way to increase performance is to restrict the scope of its definition. Sadly, it is also the easiest way to incur problems. For example, we can restrict the definition of fast from “fast during a whole championship” to “fast in this particular slope.” Or, we can restrict the definition of happiness from “a fulfilling career, a happy family, a good social life, and a healthy body” to “a prestigious job title” or “a coveted spouse.” Happiness Performance Big Ideas

The easiest way to hide problems is to increase the scope of measurement. If a town has a few districts whose population lives in poverty, it can conveniently hide the problem by talking about the average income measured across the city as a whole. If your romantic life is in shambles, you can conveniently hide the problem by measuring your happiness across all your activities, including your career and your friends. Big Ideas Problems

Problems grow the size they need for them to be acknowledged. A hidden problem is a problem that keeps growing, and that will damage us more painfully in the future. Problems

Whether a context is ergodic can tell us:

Energy company Enron has been awarded Fortune magazine’s “America’s most innovative company” award for six years between 1996 and 2001. It then filed for bankruptcy in the same year, 2001. The problem with these awards is that they look at returns without also looking at sustainability. They look at who makes the most smoke, without checking if they’re burning their house in the process.

It is easy to make money. I could sell my kidney or scam a neighbor. It is much harder to do so in a way that doesn’t fuck up my life.

By giving you a chance to react to problems before they hurt you irreparably, leading indicators increase your ergodicity. Conversely, lagging ones decrease it. Choose wisely what to measure. Lagging Indicators