Not logged in, please login to view portfolio!

Blog Stocks

Zero-Sum Game

Sarmaaya Desk
Sarmaaya Content Team

Key Takeaways

 

  1. Zero-sum game talks about a situation where one person’s gain is equal to another person’s loss
  2. Zero-sum game implies that the net change of wealth or benefit is equal to zero.
  3. In Financial markets, zero-sum game examples include options and futures.
  4. In a closed universe, the supply of resources do not change, cannot grow or deplete and there is no external intervention.

What is Zero-Sum Game?

A zero-sum game is a part of game theory and is a situation where one person’s gain is equal to another person’s loss, implying the net change of wealth or benefit to be equivalent to zero. There is no limitation in regards to the number of players involved – they can be as large as millions.

In Financial markets, zero-sum game examples include options and futures. For every person gaining a contract, there’s always a party who loses.

 

Understanding Zero-Sum Game

Characteristics of a Zero-Sum game includes demand exceeding the supply of the resource, a fixed quantity of resources and the net change of participants being equal to zero. In a situation where supply is not enough to meet demand, and that it cannot be adjusted – the only way to distribute those resources is to ensure that an equal number of people do not receive it.

From this, it can be concluded that zero-sum game is an intellectual exercise. In some circumstances, it can accurately describe the real world such as trade involving contract where one person pays and other receives. However, in almost all other trades, nothing ever occurs in a closed universe because the world is far bigger than just a zero-sum game. (in a closed universe, the supply of resources do not change, cannot grow or deplete and there is no external intervention).

Stock market trading is often considered as a zero-sum game. However, it is important to note that since trades are made based on future expectations and varying preference for risk – meaning that trade can be mutually beneficial as well. Long term investment is a positive-sum situation because then capital flows resulting in increased production, job creation, increased savings and income that provides investment opportunities – resulting in the continuation of the cycle.

 




Related articles

My Watchlist

Not logged in, please login to view watchlist!

Sarmaaya was founded in 2017 by Laeeq Ahmad, and created in response to the non-existence of a web-based platform that could audit traders globally and at the same time; enable traders to share their knowledge with people interested in their strategies.

Disclaimer
abcData (Pvt) Limited (Sarmaaya) is a Pakistan Stock Exchange (PSX) authorized data redistributor. Sarmaaya & CS Solutions (Pvt.) Limited (CS) do not guarantee the timeliness, accurateness, or completeness of any data or information on the website. Sarmaaya & CS makes no warranties, express or implied, as to Sarmaaya & CS or any data or values relating thereto or results to be obtained therefrom, and expressly disclaims all warranties of merchantability and fitness for a particular purpose with respect thereto. To the maximum extent allowed by law, Sarmaaya & CS, its licensors, and their respective employees, contractors, agents, suppliers and vendors shall have no liability or responsibility whatsoever for any injury or damages – whether direct, indirect, consequential, incidental, punitive or otherwise – arising in connection with Sarmaaya & CS or any data or values relating thereto – whether arising from their negligence or otherwise. Nothing in the website shall constitute or be construed as an offering of financial instruments or as investment advice or investment recommendations (i.e., recommendations as to whether or not to “buy”, “sell”, “hold”, or to enter or not to enter into any other transaction involving any specific interest or interests) by Sarmaaya & CS or a recommendation as to an investment or other strategy by Sarmaaya & CS. Data and other information available via the website should not be considered as information sufficient upon which to base an investment decision.