Key Takeaways
- Zero-sum game talks about a situation where one person’s gain is equal to another person’s loss
- Zero-sum game implies that the net change of wealth or benefit is equal to zero.
- In Financial markets, zero-sum game examples include options and futures.
- 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.
