Ergodicity in economics: experimental learning activities for introductory finance and economics students
Theme 1 The economic inequality.
Theme 4 Alternative teaching approaches.
Secondary school seachers.
Researchers and academics.
Economics and finance students are taught that most decisions are placed within three dominating concepts: as-if theories of unbounded rationalities, as-if theories of optimization under constrains and irrational cognitive illusions (Gigerenzer 2008, p.3-4). These students leave universities with the wrong impression that their knowledge, logic and mind is enough to solve most of their real-life problems, including: health, finance, family, education and job issues. Yet, there is a growing evidence that students and even experts are unable to find optimal solutions, cannot make decisions in unknown risk situations, systematically deviate from laws of logic and use simple heuristics which mostly derive from interaction between mind and environment through learning and experimentation (Simon 1990, Smith 2005). Moreover, their success or failure is very often the result of a small initial (dis)advantage or a few minor random shocks, which shape the future outcomes of decisions (David 1985). This process causality is often defined as “path dependence” problems in economics (Page 2006). Both of the above mentioned research agendas (mostly implicitly) introduce the concept of ergodicity(Peters 2019). The introduction of the concept can change the perception of risk and uncertainty in economics and finance. Undermining of the periodicity assumption explains the existence of the well-known expected utility paradoxes, redefines the use of probability in economic and finance practice and demonstrates the mechanism of creating wealth inequality. The origin of the concept comes from statistical physics and most of the economic and finance students have difficulties with explaining exactly how theoretical principles are related to their real-world experiences, such as investment, income or health inequalities. In our opinion, this situation creates and educational blind spot in economics and finance. Thus, the goal of this paper is to present classroom experiment based on the Polay's urn which allows experiencing the differences between the ergodic and non-ergodic worlds. The Authors discuss how this experiment has been adopted to classroom use, shows Monte Carlo simulations, presents references to economic theory but also to real life situations, film, literature and poetry and show evidence suggesting that these activities increased students’ awareness of the ergodic and non-ergodic concept.
Presented by: Tomasz Kopczewski (1, 1)
Downloadable files: 21_66_2021-10 AEEE Kopczewski.pptx