Zero Sum Game (ZSG)

I was surprised at the reaction to the Zero Sum intro yesterday. I keep forgetting there are lots of bad memes and worse ideas that have been inappropriately accepted as accurate floating around.

I am neither endorsing nor criticising zero sum; I am only acknowledging as a reality. I have found that those who refuse to acknowledge it are often trying to sell something.

Here’s the bottom line: Any finite resource is a ZSG. Even an infinite resource has only 100% of marketshare, to be divided amongst competitors. That percentage is also a ZSG.

Let’s see how some of these zero sum issues apply to different areas:

Markets: are probably the best example of a ZSG. In 2000, the Wishire 5000 was worth $1.2 trillion more than it is today. Some people bought, some people sold. Mark-to-market, there is a loss to the collective buyers from the collective sellers. Its even more specific with individual companies.

I short the SPX to you — each tick is zero sum — there’s a winner and a loser.

Stocks that always go up and never go down are exempt from this; Please let me know as soon as you find any.

Business: Marketshare is another example of zero sum: Consider all the ZSG losers who have seen their businesses hurt by the winners in competition:  GM is losing to Toyota; DJ, NYT, WP, and Knight Ridder have been losing to Yahoo & Google; Sony PS is losing to MSFT XBox; Intel has been losing to AMD.

There are situations where the pie is expanding, but even there the ZSG works in percentage basis (not raw numbers).  Google has been taking search share from Miscrosoft and Yahoo. But the entire pie has gotten so big so quickly that even the % share losers are still winning — short term.

Increase in gasoline prices? When Exxon Mobil, BP Amoco and Conoco Philips win because Oil goes up, Wal-Mart and Target lose. Why? There’s a finite amount of cash to be spent, and the more that goes to energy, the less there is for discretionary items. (If you have enough income, the increase is irrelevant to life style, but still comes out somewhere).

Indeed, the decrease in recorded music sales, newspaper and magazine ad sales, TV ratings, movie theater attendance — indeed, all old school non digital entertainment — is a function of a finite attention span. Video games, blogs, internet have all taken some of the pie. Consider iTunes and Morpheus and the demise of Tower records;  My colleague Dennis Kneale at Forbes was incorrect last night when he states that newspapers anbd magazines are fine;  They have been the losers in the ZSG for media.

Economy:  The economy is more of a zero sum
game than most people realize. The Politics of the past decade has been
more about capturing a bigger piece of the pie, rather than EXPANDING that pie.

That is a zero sum game.

Consider taxes: The dividend and capital gains tax cuts fell to a
very narrow portion of the population (of which I am a prime
beneficiary). The known costs of these — increased deficits, weaker
dollar strength and buying power — are borne more by certain segments
in the population than others. That is zero sum.

So too interest rates: Cutting them to half century lows was great
for holders of dollar denominated hard assets: Real Estate, Oil, Gold,
Industrial Commodities (Copper, lumber, etc). But the costs of these rate cuts were borne by those interest rate retirees dependent on a their bond portfolios.

Its easy to overlook the zero sum element in a rapidly growing
environment. The post war United States was a classic example, as the middle class expanded enormously. Or, consider the 1990s, where there was so much cash as the pie rapidly inflated that there was lots for nearly everyone.

But do not
misunderstand this: In any non-infinite system, apportionment of costs
and benefits is zero sum. We have corporate profits at a 53 year record high — and the wage and income percent of GDP is at a record low. If you think that is a mere coincidence, you have not been paying much attention. 

There is no free lunch. That is one of the first rules of economics.

UPDATE 2:  October 14, 2006  10:48am (really. funny coincidence)

Some of the criticism of the ZSG post is that I am being overly broad in my usage of the term. That is a fair and accurate complaint.

While I believe market transactions are often ZSG, any major transaction in an economy will have winners and losers; but it is unlikely that the net result ever precisely adds up to zero. My description of this as  Zero Sum Game is both imprecise and inaccurate.  It is more correctly described as a Win/Lose battle over limited resources.

My apologies for the confusion . . .


UPDATE:  October 11, 2006  10:48am

Excellent set of responses in the comments section. Before I get further accused of being a Malthusian, allow me to quailfy a few things:

In our prior discussions of What is Wealth, I discuss several very obvious ways the world can be a non zero sum game: Developments in Technology, gains in individual leisure time, improvement in health care, broad property ownership, increased democratic rights —  are a few examples of where we are much better off than our forefathers. In these instances, it is not a zero sum game.

Amongst the academic writings, there are several areas where the classic school of thought and  accepted concepts spill that are overbroad (and occasionally wrong):

-Markets are perfectly efficient;
-Prediction Markets are accurate;
-Zero Sum Games never apply to broad economies over time.

I am not saying that everything is always a zero sum game — not even close. But I do believe that many more things are zero sum than people realize.



Disclosure: long BP Amoco and Conoco Philips

Print Friendly, PDF & Email

What's been said:

Discussions found on the web:
  1. Mark commented on Oct 11


    I am shocked to see that such an intelligent person does not understand ZS! Stock markets are not ZS by any means. Wealth is actually created by the stock market, whereas futures and currency markets simply transfer wealth.

    So long as someone is willing to buy ABC from you at a higher price it could in theory rise infinitely.

    A simple example. John Joe and Dave all like ABC Corp. John buys 100 @ 25. The stock rises to 30 where John sells to Joe. The stock then climbs to 40 where Joe sells his shares to Dave. The stock climbs further and Dave sells his 100 shares back to Joe who likes the stock again.

    You see, wealth was created. No one lost money, except in the sense of an opportunity cost. Although John sold at 30 for a small gain, he did not lose any money in this whole process.

    Brush up on your homework and keep up the great blogging.



    I understand ZSG; I just do not agree with the way it is defined and applied by most folks.

    And, I am still waiting for your (or anyone else’s) example of that stock that risies but never falls . . . Once you get me that, we can look into the reality of zero sum.


  2. grodge commented on Oct 11

    I am not an economist. I am a biologist, and our discipline has fought this battle over the laws of thermodynamics in regard to evolution vs. creation for over 150 years.

    The earth is not a closed system and human society is not a closed system. We have energy in the form of solar and other sources added all the time.

    Sure in any given instant the economics of the human condition appear zero sum, but the reality is that order and entropy are in a constant dance which is affected by the constant influx of outside energy.

    Robert Wright, a sociologist, wrote Nonzero Sum almost a decade ago, but his premises are still applicable today. We definitely benefit by cultural collectivism in a nonzero sum fashion– or why else would be have grouped ourselves into social units rather than fight each other individually.

    The economic markets are no different. Yes, individual trades have zero sum characteristics, but the overall benefits of regulated markets is that they create wealth (actually in reality, it is the transfer of energy from solar or geothermal to make order out of disorder.)

  3. Will commented on Oct 11

    Barry, please, unlike a futures contract, stocks don’t require a long holder and a short holder to actually exist (unless you count the issuing company as being short as someone pointed out).

    Equities are absolutely not a zero sum game and like I asked before, what does a share of stock represent, figure it out and see why you’re wrong

  4. Greg commented on Oct 11

    You want something that’s always gone up over time? How bout the US stock market, and it’s investable. DJIA is now higher than it was in 1990, so who’s lost out Barry?

  5. Wimpy commented on Oct 11

    I think Barry’s last paragraph makes the point… “in any non-infinite system, apportionment of costs and benefits is zero sum.”

    The debate here seems to revolve around the idea of non-infinite. So maybe one believes that the earth has an infinite supply of energy, but I can’t imagine that a scientist would postulate that our solar system is infinite. I suppose such definitions depend on your timeline. The same is true for social systems. We may want to believe they go on forever, but they always have an end.

    Modern capitalism is premised on the illusion of infinite growth and thus infinite wealth. There is a belief that the government can print infinite dollars or that an individual stock can go up an infinite amount. Somehow I doubt it, but I’ll let someone more knowledgeable debate the point.

  6. grodge commented on Oct 11

    Is “non-infinite” a fancy way of saying “finite”?

    Human systems are not finite, so the premise is faulty.

    BR, if you’re looking for something to consider, write a blog about how technical analysis is akin to complexity theory, ala Stephen Wolfram.

    I started reading your blog as a link from Cunning Realist, and my first impression was how you are a closet complexity theorist.

  7. Craig commented on Oct 11

    Finite systems LOL

    I bet next we’re gonna hear how world production is actually lower in 2006 than it was in 1896.

  8. dan commented on Oct 11

    “But do not misunderstand this: In any non-infinite system, apportionment of costs and benefits is zero sum. We have corporate profits at a 53 year record high — and the wage and income percent of GDP is at a record low. If you think that is a mere coincidence, you have not been paying much attention.”

    Right, and so we have to dissolve the evil corporations to allow the working man to get his fair share.

    Talk about missing the forrest through the trees.

    Are you trying to destroy your financial advisory business? You’re definitely losing credibility quickly and the credibility pie is definitely “finite”



    Whatever credibility I have comes from calling them as I see them. If profits are at a record high, while wages are at a cyclical low, knowing and understanding that provides insight into what can and is increasingly likely to happen as we mean revert.

    Thats as true for corporate profitibility as it is for GOP control of the House and what that might mean for minumum wage legislation and the impact on Walmart and McDonalds and . . . you get the picture.

    Understanding various ways to slice the data and perceive reality — without fabrication or spin — is one of the tenets of good investment startegy

  9. russell commented on Oct 11

    Not your best. I had a longer response, but it keeps getting spam blocked.

    The above comments seem to cover what I was going to say pretty well.

  10. T commented on Oct 11

    “So long as someone is willing to buy ABC from you at a higher price it could in theory rise infinitely.”

    That sounds a lot like the greater fool theory of investing. Although there’s always going to be gain in the value of the market (primarily based on GDP growth and inflation) any excess returns away from that baseline are essentially a ZSG. It doesn’t have to be linked to a single stock, either — when one company wins a larger share of the pie (say, UARM), another is probably losing share (NKE). Growth via true market expansion, rather than capture of alternatives, is very rare and doesn’t tend to last long.

    Pointing to the DOW as a counterexample here is silly, considering it’s the only one of the three major indices to be price weighted. It’s fine for day-to-day changes, but it’s essentially useless for long-term views — a basket of DOW stocks purchased in 2000 would not track with the growth rate of the nominal index value.

  11. Robert Coté commented on Oct 11

    Subtle. Good job BR. I almost fell for it too.

  12. PC commented on Oct 11

    Markets are not a zero sum game. Markets are a “negative” sum game when you factor in spreads and transaction costs.

  13. teddy commented on Oct 11

    I am shocked at all the negativity directed at Barry lately. Am I to presume that all of you are big winners in your stock market investing recently? You can only do so much with the data presented by the government.

  14. Blissex commented on Oct 11

    I can’t imagine, other than sheer bad faith or ignorance, why many commenters have been against Barry’s absolutely clear, correct, unobjectionable points, which are very valuable for investment analysis.

    His main points are:

    * Allocation of finite resources is a zero-sum-game.
    * One finite resource is percentage, e.g. market share.

    What’s wrong with that? They are both entirely obvious. And they are both very important to investment analysis, especially “The Big Picture” macro investment perspectives.

    For example in the investment game the goal is outperformance, and performance is a finite resource. Wall Street is not Lake Wobegon, and not all investors can outperform. If one outperforms, another underperforms.

    Consider for example real estate price movements: it is a clear zero-sum-game, in that any gains by home owners are paid for by non-home-owners. This has large implications for investment, because it affects the overall level of economic activity, as well as price pressure on various asset classes, and the distribution of spending power between asset holders and non asset holders, and between older and younger investors and consumers.

    Similarly for transfers of large chunks of GDP from the bottom 99% of earners to the top 1%, as they have happened in the past 15-20 years: when investing what matters to many is outperformance, and that comes from investing in companies growing faster than GDP. Which suggests that companies whose customers are the middle and lower classes are poor investment targets, as the share of GDP going to their customers is shrinking, and companies whose customers are in the top 1% are a better investment target.

    Buffett has made a lot of money by investing in companies whose fortunes were tied, via the sale of branded, aspirational, goods and services to those of the rising middle class, and right now that looks like not such a good strategy, except in India and China of course.

    Similarly for natural resources: at least in the short and medium term extraction capacity is fixed (never mind that the overall total is finite, peak oil or not), and allocations of that fixed and thus finite capacity are entirely zero sum games. If China is getting more oil, then the rest of the world is getting less, and prices change to reflect that, and so do the prices of oil company shares.

  15. crack commented on Oct 11

    Markets don’t create wealth, they put a value on an asset. Saying that people collectively deciding something is worth more than it was before ‘creates wealth’ doesn’t really make sense. Do bubbles create wealth? That’s a bunch of people deciding things like tulips are worth more than any concrete value they provide, but are the tulips really worth any more in a realistic long term sense?

    At the same time, aren’t most transactions non-zero sum? If I buy a cup of coffee for $5 I may think its expensive, but I value the coffee more than the money. At the same time the coffee shop values the money more than the coffee. From a strictly financial point of view it may be zero sum, but not all transactions are taken for strictly financial reasons.

    Anyway, interesting topic.

  16. ari5000 commented on Oct 11

    I agree that the markets are not zero-sum, however, perhaps Barry was thinking in the back of his mind that they are becoming MORE zero-sum like with the crowding of hedge funds — there seems to be a record level of shorting — although it is only about 6 or 7% of all available shares, last I checked.

    The real dilemma, as I see it — is that the markets do rely on FAITH. Wealth is certainly created but no matter how liquid the markets may seem, it is critical that the majority do NOT cash out or wealth will be destroyed instantaneously.

    Hedge funds introduce this very, very dangerous risk. When / if they hit the sell button for short-term gain — they risk setting off a tsunami of selling. When the shorts who have probably finished covering no longer provide any upside fuel, the major indexes could drop rapidly.

    The only problem with non-zero sum is this: Yes, everyone may have millions more than they had in, say, 1980. But as we all know, inflation and taxes tends to reduce those holdings significantly. It’s like what Barry was saying about everyone enjoying a higher quality of life because everyone has a VCR — but the actual cost of a house is now 3 or 4 times the average person’s salary, as opposed to 1 year. — Or maybe I read that in Newsweek.

  17. wnsrfr commented on Oct 11

    Lotta Truthiness in some of the comments.

    The term is Zero Sum Game, not Zero Sum.

    It is an analysis technique, not a stated fact.

    I personally believe in innovation, productivity increases, automation and so on, all of which expand the “pie”. Oops, a pie is a zero sum game…isn’t it…

    Sounds like a lot of posters would want to ban the use of the Pie Chart, as being anti-growth.

  18. Interfluidity commented on Oct 11

    In what sense are markets “positive sum”?

    Barry Ritholtz has a post about the zero-sum-ness of things. I think he’s right from the perspective of most traders, b…

  19. Steve Waldman commented on Oct 11

    From a trader’s perspective, markets are a zero-sum game. But equity markets exist not for traders, but to match ventures would not exist without financing with investors willing to finance them, This is a positive sum game. Traders are a zero-sum means to a positive sum end.

    [My original comment was longer, but TypePad considers it comment spam. For a detailed account of how markets can be positive sum, read the rest here.]

  20. cornerkick commented on Oct 11

    Well, since everyone else is piling on Barry, I guess I will too : )

    While we are discussing “markets”, let’s remember that they are just a reflection of the overall economy. And a Capitalist economy is definitely NOT a zero sum game. That is why Capitalism has succeeded to the degree it has such that it has no serious competition around the world.

    Capitalism has succeeded because it creates wealth better than any competing system, even while it distributes that wealth unevenly. Reasonable people can reasonably agree about what steps should be taken to reduce that inequality (possibly at the expense of growth), but that doesn’t diminsh the fact of the remarkable wealth creation.

    Since the stock market, in the long term, is the summation of the values of all publicly traded companies, and these companies share in the newly created wealth over time, then the stock market as a whole is obviously not a zero sum game, although some trades (buy long/sell short, option put/call, etc.) certainly are.

  21. me commented on Oct 11

    There is an old saying, for every person that makes a buck, someone lost a buck. I have never heard what you people are saying, that for every person that makes a buck, another person makes a buck.

    it is really easy to leave out transaction costs and inflation. Did I create wealth selling my house, or do I just have to go out an pay an inflated price for the next one?

    400 engineers at IBM in Austin just lost their jobs. We all know those jobs are going to India. Jobs are a negative sum in this country.

  22. Mike M commented on Oct 11

    Trading is a zero sum game. One winner, one loser. The stock goes up or it goes down. One buyer, one seller.

    Investing is not a zero sum game. The value of a stock is the value of future discounted cash flows. Buy stock, reveive cash flows over time.

    Currently, most market participants are traders. The value of future discounted cash flows is too low right now (high valuations), so don’t invest in stocks!!

  23. Interfluidity commented on Oct 11

    In what sense are markets “positive sum”?

  24. Jonathan commented on Oct 11

    A company goes IPO. Investors buy the shares. The company uses that money for growth. 1 year later, the company double in revenue, size, profits, etc. Who loses?

  25. S commented on Oct 11

    Didn’t Thomas Malthus try to define the world in zero sum terms in the early 1800s when he predicted the world would soon not be able to produce enough food to feed its population? Malthus fell into the trap of thinking about the world in static terms, not considering technological innovation, ingenuity, etc.

  26. The Stalwart commented on Oct 11

    If Everything is Zero Sum then Nothing is Zero Sum

    It’s never too good an idea to disagree with Barry Ritholtz, since he’s really sharp and unafraid to call people out on their nonsense. Nevertheless, I’ll take a minor amount of umbrage with his post today on zero-sum games:Here’s the

  27. ss23 commented on Oct 11

    or say productivity of people or land etc..sure the quack greenspan exaggerated it..but 1 man hour / 1 acre of land’s productivity today is worth lots more than 50 yrs ago

  28. The Everyday Economist commented on Oct 11

    Economics is not a zero sum game

    Barry Ritholtz thinks economics is a zero sum game:

    The economy is more of a zero sum game than most people realize. The Politics of the past decade has been more about capturing a bigger piece of the pie, rather than EXPANDING that pie.
    That is a zer…

  29. CG commented on Oct 11

    I’m really surprised.

    Barry is usually a very insightful guy, fighting against the forces of half-baked thought and sloppy intuitions. But here he starts off trying to defend a strong (but wrong) statement and eventually falls back to a useless tautology–“in any system, all the percents add up to 100%’–which is not, fortunately, anything like what economists or complexity theorists (or even the wonkier traders) mean by ‘zero sum’. It’s a game theory term, and Barry has just outreached his competence.

    If Barry really believes that zero sum can be applied to percentages, and thus to everything ever created, doesn’t he wonder why the term was invented in the first place? How fantastically useless and redundant! One might as well say ‘all groups are 100% of themselves’. How revelatory and inspiring! Why not call it 100%-sum instead of zero sum? Is the farce becoming clear?

    Why did this happen? Because most transactions in the stock market, where Barry begins, are indeed zero sum (or slightly negative sum, due to friction and comissions, unless you include the brokers/exchanges in the ‘sum’, in which case order is restored). But that’s a fairly uncontroversial application of zero sum. Barry, being something of a bright but sloppy dilettante (no slur; many of us fall in the same category), extends it past its definition. He’s a busy guy, posting several times a day. He didn’t actually look up what the term meant. If he had, he might have wondered why those pesky game theorists kept claiming that there were non-zero-sum games like the prisoner’s dilemma and such. “What could they be talking about?” he might ask.

    Barry, please, we love ya–stop embarrassing yourself and look up the term. Don’t distort the intelligence to suit your preconceived (and incorrect) notions, my fellow Dem.

  30. Haris commented on Oct 11

    Wow. There is way too much discussion here for such an obvious post. Obviously when you define a finite resource like “market share” any transaction will be a zero sum game. To use the market share example: it will always sum to 100%, as many of you have pointed out. Any changes will obviously be a zero sum game. But that doesn’t mean that all economic activity is a zero sum game. If I buy gas from Exxon at $2.50 a gallon, it’s because I value gas more than $2.50 a gallon, and Exxon doesn’t. Assuming the amount of money is constant [I know it’s not, but it is in the short run], then the transaction is a zero sum game as far as money goes: I lose $2.50, Exxon gains $2.50. But to say that there are no gains from this trade is hardly true.

  31. kharris commented on Oct 11

    I was on my way to say what Mark said, only Mark and a bunch of other people were faster and clearer.

    This is an Inego Montoya moment. “Zero sum” doesn’t mean what you think it means. TANSTAAFL is a folksie way of talking about opportunity costs, not about zero sum games. In much of what you have written here, you confuse those two notions. T

    his is not a unique occurance. It is more or less the norm for you to asser that those who disagree are misguided and wrong, when you understanding of the point under discussion is flawed. That’s a pretty bad attitude, though not all that uncommon. There is nothing wrong with debating these points. However, declaring “there are lots of bad memes and worse ideas that have been inappropriately accepted as accurate floating around” with the implication that this characterizes the ideas of those who disagree with you seems a particularly unhelpful path down which to lead the debate.

  32. Mark commented on Oct 11

    OOOOKAAAY now. My first check-in of the day to find that I have been “name-jacked”! At least there are again two Marks posting. For full disclosure I am the cynical smartass Mark, friend of BDG123, Alaskan Pete, Bynocerus, Eclectic and others that posts here regularly. No relation to the “Stockmarket is Not a Zero Sum Game” Mark that has enlivened discussion here this AM. Just want to make things clear (if that does so)…..

  33. T commented on Oct 11

    “A company goes IPO. Investors buy the shares. The company uses that money for growth. 1 year later, the company double in revenue, size, profits, etc. Who loses?”

    Not as simple as it seems. On a risk-adjusted basis, did investors make outsized returns relative to alternate investments? In that case, the company and its pre-IPO shareholders lost — they could have IPO’d at a higher price. Their effective cost of capital was higher than necessary.

  34. RW commented on Oct 11

    Interesting discussion. It seems logical that markets are akin to other dissipative (thermodynamically open) systems but it’s worth remembering there is a lot of ‘waste’ in such systems — they are never completely efficient and grow by ‘exporting’ entropy to the environment — so one needs to be careful about how one defines the pie; that is, the US equity market pie (or specific sub-segments of that pie) could be growing while other segments of the pie or elements in the environment are shrinking and/or becoming more chaotic.

    From an analytic perspective it probably makes more sense to think of this as a zero sum game if only to cut through the complexity; the difficulty in defining domain. IOW, whether there is always a loser for every winner is less germane than understanding there will always be ‘losers’ (one way or another) and one of them could be you so might as well plan accordingly.

    That viewpoint would make the following OT I think: William F. Sharpe has revised his original CAPM away from a mean-variance to a preferred state approach ( There are a lot of implications to this but one thing worth noting is that it could make CAPM more consistent with how asset managers actually do their work; e.g., portfolio optimization could take long tails into account and appropriately deal with incomplete information; unlike the original CAPM only a few of many possible simulations might point to buying and forgetting an index fund.

  35. GeorgeNYC commented on Oct 11

    Many of these comments remind me ofan old saying

    “An Economist is someone who believes a tree can grow to the moon if you give it enough money”

    Stock markets do not “create” wealth. They only provide liquidity. Period. They are secondary markets.

    The “creation” occurs when a company is started. Of course we could theoretically start an infinite amount of companies and create infinite wealth for all! But of course that is nonsense. What everyone in this paper profit driven world forgets is that there must be a true income producing asset to justify the value. Absent that the share of sock is truly worthless.

    Same with “investing.” Sure “investment can “create” wealth if it creates an income producing asset. But “investing” is just another word for “spending money” if it fails. You can “invest” yourself into bankruptcy. I am sure that many of the dot com boomers remember all of the fabulous parties that were thrown by companies with “investors” money.

    I think that we have had a very good run over the past 15 years with asset values rising dramatically. We have had minor “recessions” but nothing really dramatic. I grew up in the 70’s “rustbelt” before we knew what it was. I rememeber “hard” times for people when decent jobs were hard to find. The problem is that asset pricing is made at the margins. When one person thinks a stock is worth $70 not $69 well then the “value” of all outstanding shares becomes $70. And then everyone gets to borrow money based on the new “value” and leverage their holdings even more (and push up other asset prices even more). Thus one person’s “opinion” now gets magnified throughout the economy. But the truth is that the real “value” of the company is probably either the discounteded value of the revenue stream or really the price that someone would pay for the entire company. (of course sometimes that may be more but then that is why God made M & A’s).

    One final point. Yes the “stockmarket” has been going “up” in the sense that indexes have gone up. But of course you are forgetting th “survivors bias” inherent in those indexes. I do not believe that a bankrupt company continues to get included int eh indexes. They can only go “up” really. Hey maybe that is your answer! Indx funds can never really go down to zero!! Ha!

  36. Jack commented on Oct 11

    Re #1…

    Your John, Joe, and Dave story is a vast over-simplification of what has happened here. Let’s look at what has really happened here, assuming each market participant starts with $10K –

    John buys 100@$25:

    John $7500 plus 100 shares of ABC
    Joe $10000
    Dave $10000
    Total $27500 plus 100 shares of ABC

    Joe buys 100@$30:

    John $10500
    Joe $7000 plus 100 shares of ABC
    Dave $10000
    Total $27500 plus 100 shares of ABC

    Dave buys 100@$40:

    John $10500
    Joe $11000
    Dave $6000 plus 100 shares of ABC
    Total $27500 plus 100 shares of ABC

    So on a monetary basis, nothing changes as these transactions occur (aside from moving cash around between the three market participants). The only way value can be created here is if the 100 shares of ABC increase in real value. Relying on someone else to come along and pay more for these shares doesn’t increase their value, because you could simply expand the example above to include 4 market participants (with the 4th buying the shares for $50).

    All of this being said, it is true that value can be created in the stock market (it is not entirely zero-sum), but not for the reason you have described. As I said, the only way value is created is if the real value of ABC increases. This happens not through someone paying more for the shares, it happens through an increase in the discounted value of expected future cash flows that come from owning these equity shares.

    And thus, the magic of dividends becomes clear…If ABC increases its dividend, the expected future cash flows increase and the real value of the stock increases.

  37. lurker commented on Oct 11

    Great debate! Would like to add to the confusion? happening here. Market share of auto industry is not static if you consider growing demand in China and elsewhere, right? Toyota is eating GM’s lunch because their cars are better. As for company’s selling shares as shorting—this is really important IMHO–take a close look at the sales of GOOG insiders. If they thought GOOG shares were going to the moon would they unload a single share? Buffett doesn’t like to sell a single share of his company for his own reasons, but I digress. I would argue that many overpriced IPOs (anyone remember the Internet bubble?) act in reality like giant short sales with creative destruction of billions of other people’s money (or a gigantic transfer of wealth in a zero sum system). Rant over. I have enjoyed all the thoughtful posts here today. Right or wrong.

  38. Russell commented on Oct 11

    One of the problems of the zero sum game as a game is that it presumes that both parties are measuring the results of the exchange with the same “currency”.

    One of the most frequently cited markets for being a zero sum game is the futures market. Yet the futures market is clearly a market where both parties can come out ahead of an exchange. The primary purpose of the future market is for buyers and sellers of contracts to hedge their price risk. They want to be able to produce or buy a product without worrying about future price changes. This allows them to plan for the future and to make money at what they know best how to do.

    At the point that Joe’s Cereal Company buys a futures contract from Bill the Speculator – “they have won.” They will buy the product at “x” price and sell the end product at “y.” They have eliminated one element of risk from their business operations. Whether Bill the Speculator comes out ahead or behind in the deal really does not matter much to them. Joe bought time from Bill for cash now in a way that does not easily (all the wonders of Beta not withstanding) does not easily translate across the two mediums (time and money).

    As an aside Aaron Brown in “The poker face of Wall Street” does a fairly good job of making a positive externality argument for the gambling to where it also would not be a zero sum game.


  39. alan commented on Oct 11

    Well said, lurker. When the market crashes like with the internet bubble, you get one more disinflationary force concentrating the wealth. It’s a zero sum game with that event for the winners and losers in stocks, but the bond market loves it since a concentration of wealth means lower interest rates.

  40. Bynocerus commented on Oct 11

    IF, and that’s a very presumptuous, unlikely IF, the stock market were to close ranks and allow trading only amongst currently listed non-dividend paying stocks, the stock market would indeed be a zero-sum endeavor.

    However, as things stand, IPOs occur rather frequently, allowing new money to enter the market. Granted, some of the money to purchase these IPOs comes from selling other stocks, but some also comes from cash that would otherwise stay on the sidelines.

    Additionally, cash from dividends provides even more liquidity for the system. I don’t care to argue about how it is offset by inflation, only that is prevents the stock market from being a truly zero sum game.

    Note that I’ve said nothing about whether or not any true wealth is created; the money that comes from the sidelines could just as easily go towards purchasing a home, being invested in a savings account or blown on drugs and strippers. And stocks that pay high dividends usually do so for a reason. It only means that at least some new money enters the system.

    However, in terms of trading stock, buying and selling CSCO is most definitely a zero sum game.

  41. Barry Ritholtz commented on Oct 11

    I am not saying everything is always a zero sum game — Not even close.

    But I do believe that many more things are zero sum than people realize.

    Raise taxes? Then this class of people end up with more, and that group end up with less. Cut taxes? A different group. Deficit Spend? The present is borrowing from the future. Raise SS? The past is taking from the present.

    Any major shift you make on a societal (or even corporate) level has consequences, and more often than you may realize, those are ZSG reults.

  42. Trent commented on Oct 11

    The market is only zsg on a relative basis, and even then only for those who trade frequently. If my time horizon is 50 years and I don’t believe I have market timing skill I am indeed better off sitting pat for the five years or ten years the market declines, as long as it meets my expectations.

    Consider also the investor saving for a child’s college education. Money is invested, it achieves the goal, the investment is sold and the child goes to college. If the market does really well over the next four years was the investor a “loser” for sending the child to college? Please!

    As long as people have different goals and time horizons for their investments, there can be more winners than losers in the market. (And vice-versa as well!)

  43. M.Z. Forrest commented on Oct 11

    To simplify things, can we all just agree that arbitrage is a zero-sum game? If we take that premise, as time approaches zero, 100% of all transactions are arbitrage transactions.

    Now the fun. Where wealth is actually created is in technology, in other words using existing means to produce a given good more efficiently. Technology however is not directly correlated to direct investment. It is certainly true you will have no new technology if you invest 0 dollars. (Small note: I’m using technology in the public good sense, not the implementation sense.) About the only thing we can say is that if you invest $1 in research you will create between $0 and an-obscenely-finite-amount-of-money. The amount that can be invested in research is a finite amount of money. Hence research itself is a zero-sum-game. It is only in the outcome that wealth is created; the output is variable, finite, and most importantly unknown. (We don’t know if new technology will come about in 6 months or 6 years.)

    So bringing this all together, as time increases the wealth accruing due to technology increases. Once the technology is discovered there is heavy arbitrage in the form of capital and good substitution. That arbitrage however is zero-sum. So, for all practical purposes at any given time all economic transactions are zero-sum.

  44. KL2005 commented on Oct 11

    Zero Sum Game?????

    Yea all thos investors in McDonalds in the 1960’s were duped. McDonalds has not grown into a mega corporation along with YUM and others. It is all a dillusion.

    The 4.6% unemployment is another dillusion – right?

    You are blinded by your negativety and your lack of understanding of why equity markets are not a zero sum game is just amazing. The sad thing is a lot of readers actually believe what you say.

  45. fred hooper commented on Oct 11

    RW wins first prize today:
    “the difficulty in defining domain”

    Money is a zero sum game. You have lenders and borrowers. Guess who wins.

  46. JoshK commented on Oct 11

    It’s not fair to extrapolate from the zero sum nature of a trade to imply that tax cuts are a 0 sum game. Low, stable, tax rates create an environment where the economy grows.

    Following your logic, raising taxes to 100% would somehow then benefit the economy.

    Interest rates are much more complicated than any sort of zero-sum-game. That is just silly.

  47. Fred commented on Oct 11

    Some of the critical comments here are pretty whack. They sum up to zero.

  48. Jim Bergsten commented on Oct 11

    I wrote this big long thing, read it, edited it, said, “aw, screw it,” and deleted it.

    In the meantime about 20 additional posts came in. And, I’ve got real, time-sensitive work to do today for a change.

    So, here’s the gist of my unposted-post:

    The only way you will truly understand this “zero sum game” stuff is if you underatand the basic principle of relativity. That’s, Einsteinian Physics relativity, as in “there is no inertial frame of reference.”

    In other words, things look very different depending on which rock you happen to be standing on. And if you think YOUR rock is where it is, well, it isn’t.

    Damn. I think I just killed Tinker Bell.

  49. Gunther commented on Oct 11

    The stock that went never down (as long as reported) is M3.

  50. Craig commented on Oct 11

    Yes it is.
    You have ONE pie, government expenses. Who pays whatever portion of the pie is zero sum. If someone gets a cut, someone else has to pay more.

    You can play hide the salami all you want but sooner or later somone pays.

    And most of you are simply insane. The pie THE BIG PIE (other than solar heat energy) is completely limited.
    Even the sun will poop out one day.

    That cheap ass oil from Exxon was originally ripped off from Aleutians by Russians, who sold it to Seward/the U.S., who continues to rip off someone to make the scheme work. Then BP rips off XOM and the citizens of Alaska, the environment, and so on by skimping on maintenance. Someone is on the other side of the trade, which is more then *one* transaction kids. It is a string of transactions many years and centuries old of which we are the latest incarnation.

    Same for that cup of coffee no matter what we pay. The coffee farmers are not in your mix, they are impoverished. They get the short end of the deal, which is really many transactions. Zero sum again.

    I know this flies in the face of your politics, but I understand it is difficult for some folks to hold more than one idea in their little pea brains at once, especially opposing ideas.

    I don’t underestimate how silly we can be though…..we still think brown people are sitting on OUR oil and that we are paying a fair price to those to whom it belongs. If that were true, we wouldn’t need our military in the ME. Everyone would be getting theirs and happy!

    Our true value market never accounts for real cost, ever. No accounting for the cost to indiginous people, their land, way of life, culture, environment.

    That’s why we are so beloved to middle easterners.
    Short term THEY pay the price in our deal for cheap oil. Long term they will extract the remainder in higher oil prices and military/human cost.

    Barry is right. Youjust have to look up the chain of transactions, or thefts/extortions a bit.

  51. JuanBobsDad commented on Oct 11

    Didn’t Myron Scholes and Fischer Black win a Nobel Prize for showing us (among other things) that the value of a portfolio can be decomposed into a deterministic component and a random component with zero mean? There’s a lot of verbiage being spilled over the existence of the deterministic component while I read Barry to be talking about the zero-mean = zero-sum random component that is bigger than the wealth-creation signal for the market in general. At least that’s how a naive quant, physicist/engineer perceives things (without making any claims about my grasp of that elusive thing called reality).

  52. KP commented on Oct 11

    Looks like that stock is too young to have ever seen bad times. In other words, you cheated.

  53. T commented on Oct 11

    From Forbes, August 2006:
    …Shares of Manchester Inc. (otcbb: MNCS.OB – news – people ) have risen 222% in the past 21 months to a recent $6.35, generating a $210 million market cap on paper. That looks fluffy for a young company with (a) few employees, (b) no revenues, (c) a negative net worth, (d) just $116,000 in the bank and (e) an abrupt change in business. After unsuccessfully trying to become a copper, nickel or platinum miner, Manchester last year rechristened itself a used-car dealer–but has yet to operate even a single lot. A Manchester official tells FORBES an acquisition is in the offing and investors see an “exceptional business opportunity.” –M.R.

  54. Bob commented on Oct 11

    All that AND it debunks Barry’s post.

  55. eli commented on Oct 11


    19-Apr-06 4.65 4.65 4.63 4.63 9,300 4.63
    18-Apr-06 4.65 4.65 4.62 4.65 39,800 4.65

    Since you want to be pedantic.. see above.


  56. Craig commented on Oct 11


    Everyone is so wound up in their BS they didn’t see the disclosure, or comment on it…….

    BR: “Disclosure: long BP Amoco and Conoco Philips”

    WHAT? No discussion of BR going long consolidated oil?

  57. Blissex commented on Oct 11

    «For a detailed account of how markets can be positive sum»

    But there is no need for that — I am sure that Barry, as well as myself, understand perfectly well that some markets are not ZSGs just as some are. As Barry stated, markets about finite resources are necessarily zero sum though; but even this does not imply that markets in general are.

    However a secondary point that Barry seems to be making is that many more markets than people think are about allocating a finite resource, and this has profound implications for asset investments.

    When is an economic game not a ZSG? When when the losses of the loser are smaller than the gains of the winner, in other words when there is increasing value added, that is when there is productivity growth.

    Now as to the whole economy value added, that is GDP/GNP, grows at around 3% per year in real terms (depending on where and when). So on a yearly basis 97% of the value of all games is zero-sum… If my company’s earnings grow faster than 3%, somebody else’s earnings must be shrinking.

    Now 3% compounded over time is a big deal, so the non-zero-sum games are significant in the long term. But many still remain zero-sum because they are about finite resources.

  58. barry jr. commented on Oct 11

    Hi Barry, I don’t think you really gave good descriptions of non zero sum games. Computers reduced demand for paper and and took some gwoth from the paper mills. Even companies that made wooden splits lost share to casts, which are now fiberglass, or inflated.

    I think you might say that population growth is a nonzero sum game but after all each human added to the planet came from the absorbtion of a lot of energy and matter. I don’t think you can say with confidence anything is a nonzersum game until you find the limits of the universe.

  59. just_observing commented on Oct 11

    “…but after all each human added to the planet came from the absorbtion of a lot of energy and matter. I don’t think you can say with confidence anything is a nonzersum game until you find the limits of the universe.”

    As someone stated before, is the Sun eventually crapping out a good enough answer for you?

  60. Eclectic commented on Oct 11

    You’ll never satisfy both sides of this debate.

    However, the true answer is that there are both Zero Sum and non-Zero Sum elements embedded philosophically within a discussion of wealth.

    My personal (partial) definition of ‘wealth’ is that it is: a ‘qualitative abstraction’ and furthermore that there are only two permanent investments of abstracted wealth; Inherent Commodities and pure intellect.

    Some of you in your comments have spoken to my definition of Inherrent Commodities without defining them exactly yourselves. They are elements of attained infinite productivity in terms of human perception and are therefore both priceless (but, strangely, have no exchange value) and universally owned; examples are: tides, gravity, the machinations of weather, wind, solar energy, and many other powers, compounds, functions and forces, etc.

    To the extent that we conceptualize money as being (my definition): ‘the coercive or compelling force that ordinarily facilitates the cooperative exchange of goods or services’… there does exist a non-Zero Sum element to economic exchange… because our conceptions of money in these terms allows for the simultaneous mismatching of value judgments between or among participants to the exchange. This is because money itself, when conceptualized this way, e-x-i-s-t-s as a native non-Zero Sum element.

    To the extent that we conceptualize money as being: ‘the finite sum total of tangible commodities’ then, purely by definition, exchanges must be conducted on a Zero Sum basis.

    For example: hold out your two hands. In the left assume a handful of corn; in the right assume some other non-corn commodity money or its ‘temporary’ fiat equivalent.

    Corn exchanged for corn must be a Zero Sum exchange; today, tomorrow and forever. Two people can’t at the same time either consume it or possess it.

    The exchange of corn for its ‘assumed equivalent value’ allows for erroneous interpretations of value by those who make exchanges (from the perspective of the corn). Therein lies the also erroneous conception of the creation of wealth and thus the permitted non-Zero Sum element.

  61. Jason G. commented on Oct 11

    I think I see where a lot of the confusion is coming from.

    Broadly referring to consequences as a zero sum game is a bit off… In a zero sum environment, everything has an equal and opposite consequence. However, consequences do not always imply a zero-sum game.

    There are winners and losers to any economic choice, but the sides don’t always balance. Take your example of low interest rates — yes, retirees suffered as their dividends fell, but was it the same size as the gains from keeping the US economy out of a depression? I don’t think that example is zero sum, but rather one of not-quite-so-obvious consequences that are significant.

    Investing in the stock market is a zero sum game — if you base the zero at the growth of the economy (GDP) and inflation. For anyone to get an above-average return, someone else must get a below-average return. Witness all the mutual funds who can’t keep up with their indexes.

    As populations, technology, and effort increase, the whole pie increases.

    There’s also a fishy factor with credit and liquidity expansion. Money multipliers cause the pie to grow at a different rate… and often in sustainable ways. Credit expansion fires the animal spirits causing quite a few people to get excited and work harder (effort increases). As long as the credit expansion is put to good use, the whole thing should be sustainable.

    Of course, in the current environment we have not been putting the credit to good use, but that’s a different story.

  62. angryinch commented on Oct 11

    Barry says: “there’s a finite amount of cash to be spent.”

    What is this “cash” whereof you speak?

    Seems to me that there may be a finite amount of cash, but a nearly infinite amount of credit…at least at present. So long as Joe Soccer Mom can forestall payments, draw on bigger lines of credit, extract equity from whatever remains from his housing ATM, the consumption game can go on.

    Folks talk about the Fed “tightening” campaign. But when you look around, you don’t see any credit tightening. Just the opposite, in fact. Interest rates may have risen a tad, but just a tad. And access to credit is still only limited to those who can fog a mirror.

    Though it seems like a thousand years ago, I can distinctly remember a few times in my life when it was actually hard to get a credit card or borrow money. Certainly not the case today.

    I assume much of this has to do with the ability of the finaglers to offload risk—whether credit portfolios or mortgages and so forth—to third-parties.

    This is all a grand little game which will continue until it doesn’t. No doubt there’s some sort of upper limit on how much debt/credit the avg Joe can carry. But I don’t think we’re there yet.

    We’ll know we’re reaching the end-game when we stop hearing ads on the radio touting “bad credit is our specialty” and “no interest for five years, no payments for 18 months.”

    Cash is still absolute trash. Went to buy a car a few months ago. Wanted to pay cash. They wouldn’t even offer me so much as $5 off if I’d paid cash. They wanted me to buy on credit. That’s where they make their money.

    How much longer this nonsense continues, I have no idea. But it’s lasted the better part of 25 years and is reaching epidemic proportions now. When it hits the wall, it will be less than pretty. But until then, party on.

  63. donna commented on Oct 11

    I think Barry’s right in that RIGHT NOW we’re playing a sero sum game, fighting over the wealth of the last system of wealth creation instead of creating a new one.

    Where are the new technologies, the new power sources the new jobs? Instead, we’re fighitng the last war over oil and redistributing the wealth of the last go-round of the wealth creation cycle.

    I want to see our leaders move us to the future, not stagnate us in this dead-end war over the last cheap source of energy. Why aren’t those damn solar panel on all our roofs already and the geothermal systems build and where are all the cool new windmill designs? We ought to be using what we have now to build the future – not give the last crumbs of wealth to the already rich.

  64. Jim Bergsten commented on Oct 11

    God I miss “Adam Smith” (George J.W. Goodman). Go read his “SuperMoney” (written in 1972) if you can even FIND a copy. It will tell you everything and more than you want to know about this topic.

    Then, educated, elucidated, warm, and content, you can go back to trading as if none of this had ever happened.

  65. trader75 commented on Oct 11

    Okay, here’s my two cents: The markets are a zero point oscillating above and below a rising trend.

    Lemme ‘splain.

    First, think about global energy markets, i.e. fossil fuels. The paradox is that energy is both zero sum and non zero sum at the same time.

    On the one hand, there is a finite quantity of cheap oil in the world. The more oil we burn, the more we have to rely on the stuff that’s more expensive and harder to find. The effects of this have obvious zero sum implications at the margins.

    On the other hand, fossil fuels are little more than stored sunshine–a solar bank account of sorts, eons in the making–and the sun continues to bathe us with latent energy. According to Michio Kaku, we make use of maybe one millionth of the solar output theoretically available to us. (Or a billionth, if you include solar output not absorbed by earth.)

    So: zero sum is very real. $75 oil, and the petro-dictator phenomenon, is a product of energy resources as zero sum game.

    Yet, as Kaku points out, the possibile for near-infinite energy growth is real too. A sufficiently advanced civilization could theoretically teach us how to increase our energy use by orders of magnitudes.

    The Simonists tell us not to worry about the zero sum nature of global energy markets–i.e. the fact that the cheap oil is going away–because they are confident that advances in technology will enable us to find more. Over the long term, they have a pretty decent argument… with room for some ugly bottlenecks along the way.

    Those who deny the zero-sum nature of markets are thinking in a similar way. Because human productivity increases over time, thanks to innovation and technology, the size of the total pie is continuously expanding on balance.

    BUT, and it’s an important but, that pie is expanding at a slow and steady rate. If you could plot the rate of true wealth creation–which is something different than market machinations, and harder to quantify–you would see uptrends and downtrends and all-around-trends within the context of a long-term uptrend overall.

    Within that context, the zero sum effect is very real on a short to intermediate term basis.

    Someone who says the markets are not zero sum because they can buy stocks now for their retirement without hurting anyone is actually making a different argument. Like the Simonists, they are arguing for the likelihood of continued wealth expansion overall via further advances in technology and innovation. (This advance is not a guarantee, by the way; just a very strong likelihood. It’s theoretically possible we could return to some kind of dark ages, or take a multi-century time out.)

    The markets are very much a zero sum game… especially if you think about it in terms of benchmarks and activity costs.

    Think of it this way: no matter how much growth you have, no matter how wonderful the global economy is, only a minority of investors will outperform the averages overall. Therefore, anyone with an active investment mindset has implicitly embraced a zero sum reality: they are competing to be one of the privileged few who receive above average returns.

    Anyone who is NOT explicitly competing for above average returns has no real reason to invest actively. They should be in passive index vehicles.

    The essential argument for passive index vehicles, in fact, is that the reality of zero sum makes active investment not worth the headache; tis better, the Bogleheads say, to just grab a share of the expanding pie and let the other guys fight over a few extra basis points.

  66. opty commented on Oct 12

    Well, that’s exactly what I am trying to say for a lot of time. Everything is a ZSG, starting from the point of limited resources.
    The problem is that people don’t look at the bigger picture, they look only at the money and certain players in market transactions.
    It’s not important If a share rises in value, in fact someone looses with this “growth”, always…

  67. Eclectic commented on Oct 12

    Trader75, you have some good points that I want to expand on. I’ll quote you and then (*****make comments of my own).

    “Those who deny the zero-sum nature of markets are thinking in a similar way. Because human productivity increases over time, thanks to innovation and technology, the size of the total pie is continuously expanding on balance.”

    *****it is because, as I have said on this topic before, human productivity is not a philosophical arbiter of the availability of goods or services in any specific era or time, but merely a ‘real arbiter of costs in real time present value.’ This means in practical terms that your common affordability of some goods or services that were infinitely priceless in the past (they were unavailable; examples are: flight… heart surgery… the Internet) derives from human productivity in a manner that would only seem to cross the boundary of the infinite. Another practical expression of this is that no person of great wealth in the past could have afforded what we commonly afford today, although our modern affordability is ‘not held hostage to wealth.’ This is the true engine of wealth creation, because it o-b-v-i-a-t-e-s the exchange value of money, as we observe the concept of money in conventional terms. This obviation of money (if you will; the destruction of money) i-s abstracted w-e-a-l-t-h, and there are only two philosophical permanent investments in abstracted wealth; Inherent Commodities and pure intellect.

    “BUT, and it’s an important but, that pie is expanding at a slow and steady rate. If you could plot the rate of true wealth creation–which is something different than market machinations, and harder to quantify–you would see uptrends and downtrends and all-around-trends within the context of a long-term uptrend overall.

    Within that context, the zero sum effect is very real on a short to intermediate term basis.”

    *****it is because in very short intervals human productivity has little time to philosophically approach infinity, but as it does, in time, approach infinity, it marginally obviates the exchange value of money, by also obviating its basis of exchange, labor; that is, money’s real identity in all cases is: labor, either intellectual labor or physical labor, but both are expressions of ‘pure intellect.’ As human productivity approaches infinity, all non-inherent commodities become Inherent Commodities and join those that pre-existed as attained elements of infinite productivity within the investments of abstracted wealth. What would happen at the philosophical point of infinity in human productivity (were it possible that we could reach it)?… Wealth would become permanent, and money would cease to exist… cease to have exchange value, because labor would become permanently obviated.

  68. trader75 commented on Oct 12

    Eclectic, wow.

    Here’s a simpler analogy that occurred to me over breakfast this morning.

    Think of the markets as a pool of water.

    At any given moment in time, this pool of water is finite. Therefore, zero sum applies. (If you account for transaction costs, negative sum applies.)

    But, via the process of wealth creation, the pool of water is being added to over time. Sometimes there are droughts, and the pool shrinks… at other times there are floods, and the pool rapidly expands.

    Over a long period of time–with much fluctuation between here and there, including drawn out contractions–the tendency is for the pool of water to increase in size.

    BUT–and there’s that but again–even though the pool is increasing on balance, it is still of finite size for any point at which you measure it.

  69. trader75 commented on Oct 12

    One other tangential comment, relating to eclectic’s last paragraph.

    Economics is all about the allocation of scarce resources… and the ultimate resource is energy.

    If we ever ‘crack the energy code’, we will be able to turn Australian deserts into lush beach resorts. (Heck, they are already trying something like this in Dubai.)

    Because energy is at the heart of production and transportation cost, solving the energy riddle could obviate the foundational principles of economics. Not always and everywhere, but in large part.

    Infinity is a useful concept to ponder because, while infinity is an abstract concept, there is such a thing as ‘practical infinity,’ i.e. having a resource in such overwhelming abundance that it’s virtually the same as infinite. (Think of Bill Gates’ checking account. There are some things he can’t buy, but pragmatically speaking, his material consumption choices are infinite.)

    The closer that energy costs get to zero, the closer we get to this ‘practical infinity’ in terms of human productivity.

    The other cool thing is the Kurzweil effect–the implications of entering ‘the knee of the curve’ as he calls it. We don’t know how rapidly future breakthroughs will happen. Think about the cure for cancer, for example… when someone comes up with a genuine cure, the space of time between no-cure and now-there-is-a-cure will be comparatively small. The same thing could happen in terms of energy breakthroughs, on a wide variety of smaller scales or maybe in a handful of big leaps. Some biotechnologist has a eureka moment and figures out how to turn cheat grass into gasoline. Or something.

    A lot of assumptions will be challenged. They are being challenged now in fact. It’s fun to think about.

    I don’t think we’ll be heading into utopia any time soon though… people are still people. There will probably still be money, and crime, and fraud, and sad to say, war, even in a future of unbelievable abundance.

    In Jonathan Knee’s book, “The Accidental Investment Banker,” he cites an interesting quote on academia: the politics are brutal because the stakes are so low. Or something along those lines. Takeaway being, material prosperity won’t necessarily bring out our better natures. We’ve got to work on that separately.

    Anyway… sorry for diversion. Back to work…

  70. my1ambition commented on Oct 12

    “A simple example. John Joe and Dave all like ABC Corp. John buys 100 @ 25. The stock rises to 30 where John sells to Joe. The stock then climbs to 40 where Joe sells his shares to Dave. The stock climbs further and Dave sells his 100 shares back to Joe who likes the stock again.”

    And when the stock falls??? When you buy someone else sells. Someone WILL gain, and someone WILL lose.

    “A company goes IPO. Investors buy the shares. The company uses that money for growth. 1 year later, the company double in revenue, size, profits, etc. Who loses?”

    Its a Macroeconomic stance, not a microeconomic one.
    For every company that succeeds another fails.

  71. my1ambition commented on Oct 12


    Money is Barter. Barter is Trade. Trade is Balance…ZSG.

    Inflation, credit, demand…these all push the sum up but not out.

  72. Eclectic commented on Oct 12

    My1 and Trader75 (*and BR),

    I have some new big fish for T75’s pond:

    Assume you are a singular individual living entirely alone and dependent on your own efforts since birth, without the slightest contact with other humans. It’s not so impossible to imagine… much like a Robinson Crusoe type individual might live, except our imaginee is not Robbie and there’s no Man Friday…. Too, our select individual will never, even unto death, have contact with any other humans.

    Tell me answers to these questions according to what you might imagine would be his perceptions:

    –Does he conceptualize money? I have to say that’s a tough question, so, if you think so, you’ll need to justify and explain it.

    –Does he understand… profit?… trade?…barter?

    –What would he consider wealth to be?… What about riches?

    –Can he create wealth?

    *BR, if you’re listening, you’ve stated in an earlier piece that wealth requires ‘relativity’ for existence. Do you mean by that statement that our Robbie could not experience wealth?

  73. JR commented on Oct 13


    Haven’t read all 73 comments to your ZSM response, so maybe this has already been pointed out… We all pony up to play (ie. trading costs, mgt fees, etc). This is essentially our “buy in” to the game. A large part of the winning in the market is simply the exchange of these dollars…

    Another point…if the market wasn’t a ZSG, there would be no bell curve distribution of the winners and losers. Statistics wouldn’t work and much of the investment world would cease to function.

  74. Steve Randy Waldman commented on Nov 19

    From a trader’s perspective, markets are a zero-sum game.

    But equity and hedging markets, when they function properly, are positive sum games for an economy as a whole. That’s why “investing” is treated differently than “gambling” from a social welfare perspective, and legal even in Utah.

    Here’s an example of poor zero-sum reasoning: “I bought 100 shares of WhizCo from Joe. The stock went up $10 per share therefore my gain is Joe’s loss.”

    That’s true 99.9999% of the time (and the people who criticize Barry by implying opportunity costs don’t count are full of it). But the 0.0001% of the time when the seller is the firm or entrepreneur are what make capital markets positive sum.

    An example: Here at WhizCo, owing to our unique mix of technology and assets, we have an opportunity to develop the ReallyCoolThing[TM]. But to do so, we require a lot if capital up front, and it’s a risky venture. So, we — the existing shareholders — sell part of our stake in WhizCo by issuing stock. With the money, we develop ReallyCoolThing, and it’s the best thing ever. It sells very, very well. WhizCo rakes in profits, and its stock skyrockets.

    Clearly, the recent purchasers of WhizCo gained from our sale of stock. But did the sellers, the existing stockholders lose? NO, because they could not have realized the gain in stock price if they hadn’t sold. There is no legitimate opportunity cost inherent in the sale, because the stock price would not have gone up if WhizCo had not sold stock to finance its project!

    Stock markets don’t exist for traders. They exist for firms to obtain financing for risky ventures at the lowest rational prices, so that wealth-creating ventures that might otherwise not have occurred do occur. Traders function is to price stock accurately. Traders play a zero sum game — Barry is right about that — that is esteemed more than betting horses only because it contributes to the positive sum game of discriminating between the worthy and the unworthy in the financing of risky ventures.

    I would argue that stock markets have been doing a poor job of this recently for a variety of reasons, and that Barry may be right that there is so little reason behind price fluctuation now that it’s best considered a zero-sum game of guessing arbitrary moves in advance. But it was not always thus, and will not be thus for long. Financial markets that forget who they are financing and why have a way of undoing themselves.

    Even futures markets, the prototypical “zero-sum game” where for every long there is a short, are not in fact zero sum. Futures markets exist for hedgers. The role of speculators is to price risk. An example:

    WhizCo can take year-in-advance orders from European customers because they can hedge the currency risk. When an order is placed in Euros, WhizCo buys dollars for Euros via 1-year-ahead futures positions. Knowing exactly how many dollars they will receive in a year, WhizCo is able to price its goods without assuming currency risk. They would not be able to afford to enter the European market if doing so would require them to risk selling in Euros, but getting paid a fraction of their dollar costs because the Euro has plummeted by the time they make delivery.

    WhizCo’s futures positions, in isolation, are zero sum games. Sometimes they gain on the futures, and someone else loses. Sometimes they lose, and someone else gains. But WhizCo does not buy futures in isolation. By hedging legitimate orders, it in fact neither gains or loses by entering into the futures trade, but exactly offsets the change in the value of its Euro revenues. WhizCo gains overall, because it would not have built a large, wealth producing business in Europe had it not been able to hedge.

    Suppose, due to persistent dollar decline, WhizCo’s contracts turn out always to be losers. WhizCo still gains, because their European business is profitable, and they weren’t hoping for speculation gains. Speculators are happy, because they took money from WhizCo that WhizCo would never have earned if it hadn’t been able to hedge. This is a win-win scenario, positive sum.

    By definition, market share, or any relative valuation, is zero sum. But stock markets and hedging markets are not about rankings. They are important institutions involved in positive sum wealth creation. The zero-sum games played by traders serve to increase the total absolute sum wealth of an economy relative to what would have been, had reasonably priced hedging and risk-tolerant financing not been available.

Posted Under