Alex Adamou (ZONLab)
Abstract. This talk begins by examining how the widespread use of ensemble averages to study asset price fluctuations leads to perilous advice about how much one should borrow to invest. It is argued that time averages are more relevant in the non-ergodic processes typically found in finance and lead to the definition of an objectively optimal leverage. Simple economic arguments are made for a new form of market efficiency, in which markets self-organise to constrain optimal leverage. Empirical studies of stock market data confirm this hypothesis, which, if true, may help policy makers avoid future crises caused by excessive borrowing.
A similar change in averaging can provide a more socially meaningful measure of national economic growth than the classically used ensemble average, the Gross Domestic Product, which is insensitive to wealth inequality. A new average, called the Democratic Domestic Product, is introduced. Links are made between these and related ideas in statistical mechanics.