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Zero and Nonzero-Sum Games

Traders often talk about zero sum games. This discussion came from a branch of game theory which deals with the decision making process. Game theory is not simply the study of games. It is the study of how many different and complex problems may have simple solutions. Game theory helps determine the proper decisions.

Successful trading is highly dependent on proper decision making. Game theory may be helpful in understanding some of the decisions required in trading.

A zero-sum game is a game where the amount lost by one or more players is equal to the amount gained by the other players. Chess is a two person zero-sum game. If one player wins, the other player loses. If there is a draw neither player gains or loses. Poker is an example of a two or greater person zero-sum game. If there are more than 2 players, then one or more of the players can win at the expense of the other players. However, all players can not win because at least one player must provide the profits and therefore at least one player must lose.

The stock market is a nonzero-sum game. For example, I buy IBM for $75. I sell it a week latter for $85 to Stock Buyer-2. Stock Buyer-2 sells the same stock a week latter for $95. I made money and Stock Buyer-2 made money. No one lost money.  This same process can yield losses when for everyone when stock prices declines. If I buy IBM at $95 and sell it to Stock Buyer-2 for $85 and Stock Buyer-2 sells IBM for $75, then we both have a loss. Everyone lost money.

To complicate the discussion, it is possible to have a negative –sum situation. Commissions and overhead and other expenses must be considered in the real world. Unless the profits exceed the expenses, the result is a loss.

Zero-Sum Trading Report

 Download - "The Winner & Losers of the Zero Sum Game - The Origins of Trading Profits" by Lawrence Harris from Turtletraders.com. This free report is about zero sum trading, the single biggest reason successful traders win. In the long run, winners profit from trading because their trading system has a positive expectancy. Also, see our article on expectancy.

 

 

 

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