In this paper, The irreversibility of time – Or why you should not listen to financial economists, we continue to explore the subject of risk management as a follow-up to our recent publication, “The Wrong Type of Snow: Risk Revisited,” while delving deeper into the subject of having better tools for improved risk management. We attempt to explain the difference between an ‘ensemble average’ and a ‘time average’, alternative terms for arithmetic mean and geometric mean, as a means of providing a positive contribution to our understanding and management of risk.

Some readers may already be braced for a complicated statistical debate, but we believe the debate can be considerably simplified by invoking a rock-solid physical law. Our hope is that this paper brings clarity to a potentially difficult subject and, at the margin, provides a positive contribution to our understanding and management of risk.