Repetition Economics

In Repetition Economics: The Story of the Hunter, the Mammoth, and The Wolves, Matt Hollerbach writes:

Human decision-making is quite a complicated problem. One of the leading frameworks for how people make decisions is called Prospect Theory. It was was developed by Daniel Kahneman and Amos Tversky (K&T) in the 1970’s and 80’s. Kahneman and Tversky were not economists, but psychologists. They developed their theories by giving test subjects “games” and evaluating their answers for consistency. Through these games, they determined people value losses and gains differently.  Losses “hurt” more than gains, and therefore, when people view situations involving risk, they are likely to make decisions that don’t conform with the expectations. 

Kahneman and Tversky state this behavior is because people are risk averse in terms of negative outcomes. They then take that idea and expand it to identify that people misjudge probabilities, especially at the extremes. Essentially they treat a 2% chance more like a 10% chance, and they treat a 98% chance like a 90% chance (example only).

But where K&T conclude that people are irrationally biased, Hollerbach finds that the subjects’ choices seem to maximize the geometric return instead of the arithmetic return. Yet, how are they landing on such a strategy if they aren’t doing an explicit computation? What if people’s intuition for such gambles is more rational than the cognitive bias literature suggests?

The post shows how relatively recent findings in “ergodicity economics” challenge the notion of loss aversion presented in behavioral science literature. Instead, in ergodicity, or as Hollerbach prefers “repetition economics”:

Humans evolved a “gut reaction” to match probabilities based on the geometric average, not the arithmetic average because life is about repetition.  This is why the test subjects often got these problems “wrong”, and why economists believe we have behavioral biases.

Humans understand that decisions are not “one-offs”.

We are careful about things we do repeatedly.

  1. How much can you win and how often?
  2. How much can you lose and how often?
  3. How many times will the game repeat?

We might explicitly consider 1 and 2…but we have a native sense for #3.

If you play “Russian Roulette” with 1/100 odds once, you will probably win. Play the game every day, you have almost no chance of surviving the year. Estimate your chances of getting into a wreck when running a yellow light. They are really low. You might get through the light before it changes to red. There is a slight delay before the perpendicular red light turns green. And nobody is able to start accelerating right away when the light turns green. The “expected downside” is really low versus a benefit of getting to your destination sooner. So why don’t we do it more often?

It’s because we know we are going to be faced with these types of decisions 1000’s of times in our life. Each time you try and push a yellow light, you’re very likely going to be just fine. But try and run it 10,000 times, and you’re guaranteed to get into a very nasty accident.

It’s the future repetition that keeps us from risking the yellow light.

I’m a fan of the ergodicity argument and Hollerbach’s suspicion that what economists are labeling irrational, is quite rational if the subjects are defaulting to a system 1 mode of sensing that the choices they are confronted with are repeated games.

But humans are notorious for discounting the future. We prefer clear immediate benefits, like a juicy steak today, over speculative benefits tomorrow, such as “no heart disease” or “no gout”. We struggle to save money. We procrastinate. We permit lifestyle creep in insidious ways:

  • Amazon Prime lures you in with free shipping but you end up buying more
  • You tell yourself you’ll take an Uber this “one time” instead of the subway
  • You start Doordashing. And forget how to cook.

Repetition and habits are powerful. You shouldn’t let your impulses initiate them. You should be deliberate about what you allow to recur. The people you spend the most time with will shape your thoughts. Don’t leave this to chance.

If you start taking vitamins, do you have a plan for determining if they are “working”? Or have you signed up for a perpetual liability with an unclear benefit? You can’t solve that Sunday crossword without the ginko biloba. Right? You are now gripped by a health version of Pascal’s wager.

Subscription business models are the darlings of the investment world. Recurring cash flow that forgets to opt-out. Your neglect is their LTV.

If we thought about our decisions as repeated games, then “no” should be a stronger default.

I’ll close with a section from Gary Basin’s Action Echoes:

Rather than seeing this temptation as a one-off event, view it as repeating over and over into the future. Imagine the decision you make this next time also deciding how you act in similar future situations. Your actions echo into the future. Every “bad” move has consequences later in the game. Sure, you can sometimes find ways to dig yourself out of a hole. But it’s helpful to realize that every move you make contributes to your eventual position

Reframing a decision as a bundle of future repeated actions gives a more accurate view. The goal is not to entirely avoid urges but to reframe them in a way that best accounts for their consequences. Any single temptation is not unique! The actions you take now will establish patterns that determine your future.

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