DEFINITION of 'Zero-Sum Game'
A situation in which one person’s gain is equivalent to another’s loss, so the net change in wealth or benefit is zero. A zero-sum game may have as few as two players, or millions of participants. Zero-sum games are found in game theory, but are less common than non-zero sum games. Poker and gambling are popular examples of zero-sum games since the sum of the amounts won by some players equals the combined losses of the others. So are games like chess and tennis, where there is one winner and one loser. In the financial markets, options and futures are examples of zero-sum games, excluding transaction costs. For every person who gains on a contract, there is a counter-party who loses. However, the stock market is not a zero-sum game.
INVESTOPEDIA EXPLAINS 'Zero-Sum Game'
In game theory, the game of “Matching Pennies” is often cited as an example of a zero-sum game. The game involves two players – let’s call them A and B – simultaneously placing a penny on the table; the payoff depends on whether the pennies match or not. If both pennies are heads or tails, Player A wins and keeps Player B’s penny; if they do not match, Player B wins and keeps Player A’s penny.
This is a zero-sum game because one player’s gain is the other’s loss. The payoffs for Players A and B are shown in the table below, with the first numeral in cells (a) through (d) representing Player A’s payoff, and the second numeral Player B’s playoff. As can be seen, the combined playoff for A and B in all four cells is zero.
Most other popular game theory strategies like the Prisoner’s Dilemma, Cournot Competition, Centipede Game and Deadlock are non-zero sum.
Zero-sum games are the opposite of win-win situations – such as a trade agreement that significantly increases trade between two nations – or lose-lose situations, like war for instance. In real life, however, things are not always so clear-cut, and gains and losses are often difficult to quantify.
A common misconception held by some is that the stock market is a zero-sum game. It isn’t, since investors may bid share prices up or down depending on numerous factors such as the economic outlook, profit forecasts and valuations, without a single share changing hands. Ultimately, the stock market is inextricably linked to the real economy, and both are powerful tools of wealth creation rather than zero-sum games.
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