Ensemble vs Time Risk

“The conclusion of the book addresses why “ensemble risk” cannot be treated the same as “time risk.” The difference can be understood by considering a game of Russian roulette with a bullet in one of six chambers. The rules are that if the “house” pulls the trigger and you live, you get $6 million. If one hundred people play, we can say that the expected payoff for each averages out to $5 million. But we can’t say that the expected payoff for a single person playing one hundred times is $500 million. Instead, we expect, with near certainty, that he will be dead. And if he dies on the second trigger pull, he does not get to play the other ninety-eight times. This demonstrates why an individual cannot expect to get the “average” return from the market: at some point, he will lose enough that he will “cry uncle” and leave the market. Taleb contends that social scientists repeatedly confuse ensemble risk and time risk, leading to, for instance, their condemnation of risk aversion as “irrational.”The conclusion of the book addresses why “ensemble risk” cannot be treated the same as “time risk.” The difference can be understood by considering a game of Russian roulette with a bullet in one of six chambers. The rules are that if the “house” pulls the trigger and you live, you get $6 million. If one hundred people play, we can say that the expected payoff for each averages out to $5 million. But we can’t say that the expected payoff for a single person playing one hundred times is $500 million. Instead, we expect, with near certainty, that he will be dead. And if he dies on the second trigger pull, he does not get to play the other ninety-eight times. This demonstrates why an individual cannot expect to get the “average” return from the market: at some point, he will lose enough that he will “cry uncle” and leave the market. Taleb contends that social scientists repeatedly confuse ensemble risk and time risk, leading to, for instance, their condemnation of risk aversion as “irrational.””

(From https://mises.org/wire/under-skin)