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Non-ergodicity of Financial Markets

2021.01.09 10:52 GMT

Financial markets are unpredictable and stochastic by nature. They depend on many random events and many unknown unknowns. Nevertheless,  we have an illusion that markets are predictable when we look retrospectively at historical charts, and suddenly everything makes sense. This is known as hindsight bias or I-knew-it-all-along phenomenon. Events like COVID-19 completely change the status quo and prove that we cannot time markets. This brings us down to Earth and we realize that we, as humankind, have a little control of what can happen tomorrow. But even without black swan events, our perception of randomness is distorted, and this is related to non-ergodicity of financial markets. Nassim Taleb wrote: “There is no probability without ergodicity.” Let's have a look at ergodicity and why financial markets are non-ergodic.