Ergodicity and Non-Ergodicity: A Primer
Ergodicity is a concept from physics and mathematics, but it has been adapted for use in business strategy. The Cambridge Dictionary defines “ergodic” as the likelihood that a “state or system” will happen again. Nassim Nicholas Taleb, a former options trader and statistician, is well-known for developing the Black Swan theory and applying mathematical concepts to business. Taleb explains that businesses are non-ergodic. The longer a business exists, the more risks it will face, which means business owners must stay adaptable to respond to unforeseeable challenges.
Non-ergodicity: In business, the longer a firm exists, the more risk it will encounter over time.
From insolvencies to bad debts, from loss of income to unstable market conditions, commercial risks are innumerable, always changing and unpredictable.
The Lindy Effect: Time as a Quality Indicator
The Lindy effect, another concept popularised by Nassim Nicholas Taleb, suggests that the longer something non-perishable—like a technology, idea, or business—has existed, the longer it is likely to continue existing. In simple terms, every additional year of survival increases its remaining life expectancy. For example, a book that has been in print for 40 years can reasonably be expected to stay in print for another 40.
The Lindy effect: The longer something has been around, the longer it is likely to persist.
When applied to businesses, the Lindy effect suggests that a company operating successfully for many years will likely continue operating. This highlights the value of longevity in business, where survival can indicate future success.
How the Lindy Effect and Non-Ergodicity Work Together
While the Lindy effect and non-ergodicity may appear contradictory at first glance, they are not absolute physical laws like those governing the universe. Instead, they are tools for thinking about business longevity and risk. The Lindy effect suggests that the longer a business has been around, the more likely it is to continue. Non-ergodicity emphasises that the longer a business operates, the more risks it will face.
A business that has survived for many years (an example of the Lindy effect) has not done so by avoiding risk but by continually curating it. Whether through insurance, through credit management, sagacious handling of financial obligations, or other methods, a business of this type has dealt with risks sensibly. Non-ergodicity means future risks will still arise, both familiar and new. The key to long-term success isn’t the absence of risk but the ability to adapt and respond to it effectively over time. In short, reconciling the Lindy effect with non-ergodicity is a matter of balancing resilience with adaptability.
Applying These Concepts in Business
1. Tailoring Risk Management (non-ergodicity)
Consider a logistics firm that has been operating for several years. While industry trends might suggest certain best practices or growth strategies, the owner needs to recognise that their business will face unique risks over time—risks that larger corporations might not experience in the same way.
Smaller firms are more vulnerable to unpredictable challenges than big companies that can afford to absorb losses or recover from mistakes. This is where the idea of non-ergodicity becomes valuable. A logistics business owner can’t assume that just because the business has done well in the past, it will continue to do so.
Understanding the supply chain: build resilience through diversified supply networks and flexible logistics operations to prepare for potential disruptions.
Every new year brings new potential risks, such as changes in regulations, supply chain disruptions, or fuel price fluctuations, which could affect the business.
Practical Application: a logistics firm owner should prepare for risks specific to their business. They should diversify the types of goods they transport, build relationships with a broader network of suppliers, and invest in more flexible delivery systems that can adapt to sudden changes in demand or regulation.
2. Building on Proven Products for Long-Term Success (the Lindy effect)
A manufacturer that has been producing a particular type of industrial component for over 20 years has likely seen competitors introduce newer designs and processes. The manufacturer, however, has continued to refine its established product. According to the Lindy effect, because the component has been in continuous production for decades, it’s likely to remain in demand for many more years.
Practical Application: a manufacturer who takes account of the Lindy effect should focus on gradually improving their products instead of trying to copy others or chase after what is getting attention elsewhere. They ought to ignore the hype around new products or flashy trends and build on what has already worked. For this manufacturer, it could involve improving existing production methods, boosting quality control, and expanding their supplier network to strengthen their supply chain. By building on proven strengths, the company can reinforce its reputation and improve the likelihood of continued success.
3. Adapting to Shifts in Client Demand (non-ergodicity)
A specialised B2B consultancy that has served a niche market for many years might assume that its long-term clients will continue to need its services indefinitely. However, non-ergodicity means that client needs and market conditions are never fixed. Over time, client preferences can shift, new competitors can emerge, and demand for certain services can drop—sometimes very suddenly.
Practical Application: consultancy owners should build versatility into their business models. Such an approach would involve regularly reassessing client needs and investing in new skills and capabilities. Hiring people with different skill sets, even if those skills don’t seem to have immediate utility, can be a strategic move for such a firm. Employees with varied abilities bring fresh perspectives and unique ideas, which can help the business adjust to changing commercial conditions. Ultimately, by avoiding over-reliance on a single type of client, a consultancy firm can navigate fluctuations more effectively and avoid being caught and harmed by sudden market shifts.
4. Cultivating Long-Term Partnerships for Business Stability (the Lindy effect)
Building a resilient network: trusted partnerships strengthen business stability over time by reinforcing core relationships.
An electronics wholesaler that has been building solid relationships with suppliers and retailers for many years benefits from the Lindy effect in a different way. Long-standing partnerships, like durable products, are likely to persist. Because these business relationships have already stood the test of time, these are more likely to continue and strengthen in the future.
Practical Application: a business owner who understands the Lindy effect might prioritise maintaining and nurturing existing partnerships. For an electronics wholesaler, this could mean offering better terms to long-term clients, developing more robust communication channels, and working closely with suppliers to ensure a consistent source of goods. By reinforcing these trusted partnerships, the wholesaler can create a stable network that supports its operations and improves its resilience in a competitive market.
From Concepts to Competitive Advantage
While non-ergodicity and the Lindy effect may initially seem speculative or even abstract, they can offer businesses a clearer lens for making decisions. Whether it’s recognising that the business world is unpredictable or understanding the soundness of long-standing operations, these ideas can form practical mechanisms that will aid business owners.
Knowing these principles and how to use them can lead to strategies for business owners that will help them recover quickly from adversity. By incorporating these ideas into their planning, firms can better handle change, bolster their core offerings, and build a solid foundation for continued success.
By tailoring risk management, building on proven products, staying flexible to shifts in demand, expanding supply chains and fostering existing partnerships, companies can create strategies that balance stability, the capacity to adjust to change, and the ability to return to equilibrium after crisis, failure or any sort of disruption.
There are hundreds more examples of how these ideas can aid your firm, or any firm. This article has mentioned just a handful. Because in the end, knowing about, and implementing the Lindy effect and non-ergodicity can and will help your business.
