Zero-sum Game

In mathematical game theory, a zero-sum game is a game in which losses of some of the players are exactly offset by gains of other players. Chess, for instance, is a zero-sum game, because a win for one player is a loss for another. Since the theory of a zero-sum game has some straightforward implications, one of the first questions an economist will consider in analyzing a market is whether it should be modeled as a zero-sum game or not. Very few business activities resemble a zero-sum game. More typically, each side mutually benefits from an exchange. The stock market is sometimes mistaken for a zero-sum game since one player’s payment to buy shares is exactly matched by the other player’s payment received for selling. The stock market is far from a zero-sum game; substantial wealth is created. To be a zero-sum game, all stocks would have to eventually revert back to the price at which they started trading. In contrast, the futures market is recognized as a zero-sum game.

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