Published: 2025-12-22 by Luca Dellanna
What is ergodicity and why does it matter? Learn how irreversible outcomes affect long-term performance in investing, business, and life decisions.
"One of the most important books I've read, period. It's short, articulate, and expansive on a singular subject matter — ergodicity, which is really the key ingredient to success in life, marriage, business, family, happiness, health, etc."
Blake Janover
CEO, Janover Inc.
"One of the most important books for everyone to read. Ergodicity should be taught in school and it should be a common metric in businesses that leaders pay attention to and are deliberate about."
Matt Cannon
"A fascinating book […] Once I started, I couldn't put it down […] the math is minimal, and Luca treats the subject well. I wish I had read it two years earlier"
Robert Matthews
VP of Engineering, Equifax
"One of the very best books I read about risk management. A must read."
Alessandro Francescotto
Partner, Excellence Consulting
"Profoundly insightful [...] If you are someone who often needs to make decisions under uncertainty and using incomplete information (which I think applies to most of us), then Ergodicity is a must-read."
Dev Ashish
StableInvestor Founder
"Brilliant. Must read."
N. S. Ramnath
Journalist & Author
"A brilliant, concise, thought-provoking gem. A must-read for investors."
Rakesh
Investor
"A great book for those who quickly want to familiarize themselves with the concept of ergodicity. The author goes to great lengths explaining the concept in easily understandable terms. Highly recommended!"
Auke Hunneman
BI Norwegian Business School
"It helped clarify several longstanding pragmatic questions I had about uncertainty and risk [...] a lucid explanation, accessible for a general audience."
Pankaj Saikia
Datafarer co-founder.
"Excellent book. Highly recommended. Luca compresses a lot of wisdom and actionable guidance into few words. No fluff, no fillers, only thought through foundational ideas."
Eleanor Berger
AI consultant
Insurance is a “bad bet” by expected value standards. On average, you pay more in premiums than you receive in claims: that’s how insurance companies make money.
So why do rational people buy insurance? The answer is Ergodicity.
Let’s say your house has a 1% annual chance of burning down, causing $300,000 in losses. Insurance costs $4,000 per year.
Expected value of self-insuring:
0.99 × $0 + 0.01 × (-$300,000) = -$3,000 per year
Expected value of buying insurance:
-$4,000 per year (the premium)
By expected value logic, you should self-insure and save $1,000 per year. But almost everyone buys insurance anyway. Are they all irrational?
The expected value calculation assumes you can “average out” the outcomes over many parallel lives. But you only live one life.
Consider what happens if you self-insure and your house burns down:
The expected value calculation treats a $300,000 loss as 1/100th of a problem since it only happens 1% of the time. But if it happens to you, it’s 100% of your problem, and it may be unrecoverable.
The insurer has deeper pockets than you, and for them, a house burning is not an irreversible condition, so they can price the insurance premium near expected value (plus fees), while for you it’s rational to buy at a bit more than that. This is well described in Ole Peters and Alexander Adamou’s seminal paper, Ergodicity Economics.
Without insurance:
With insurance:
The insurance company can afford to take on your risk because they do experience ensemble averages: they have millions of policyholders, so their outcomes converge to the expected value. You don’t have millions of lives to average across.
Ergodicity also tells us when to skip insurance:
Consider skipping insurance when:
Buy insurance when:
Insurance isn’t about expected value; it’s about staying in the game. Paying $4,000 per year is the price of ensuring that a rare event can’t knock you out permanently, and that you can maintain a trajectory of growth in life and business.
This same logic applies beyond insurance:
