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Respond to the question: Is the stock market a zero sum game?

08/19/2002 02:21 PM by DBS; Is the stock market a 0 sum game? Depends on how its play.
This question is a little broad since the answer depends on the way you play.

For me it is not a zero sum game. I buy a portfolio of stock which I expect to appreciate over time reasonably in line with the level of systematic risk at which I maintain my portfolio. When I purchase a stock my utility increases because that stock is expected to contribute to both the risk and return of my portfolio in desirable ways. When I sale the stock I do so either to rebalance my portfolio (increasing the utility of the investment) or because I have uses for my money outside the stock market that provide greater utility. Note that in both cases my utility increases. I am not very concerned with the short term impacts of the stock or even if the stock goes up or down since I expect some to rise and some to fall but overall my portfolio to provide a decent risk adjusted return. Assuming the party I am trading with is playing the same game we can both win since he is seeking to achieve a right portfolio.

Where the person I am trading with is a trader he is playing a different game so I don't think of this as a real game. However if you would like to it still would not be zero-sum because the utility that he gains or loses is different in nature and unlikely to be equal to the utility I gain.

I think the assumption you make in asking the questions is "Is stock trading a zero-sum game?" This is different because the circumstances surrounding stock trading are the following.

∑ Each person involved in the trade has a subset of the total available information.

∑ Based on their subset of the total available information each participant believes that a future signal will cause the stock will either increase or decrease over a short time horizon.

∑ The trader is interested in a short term gain based on his belief over the risk adjusted return of the stock.

Given these facts, a trade will take place when one investor believes their will be a signal causing the stock to increase and another believes their will be a signal causing the stock to decrease over the short term. When the short time horizon arrives a signal will occur causing a reaction to the stock. At that time the stock will increase or decrease. Even if the reason for the increase or decrease was not among those included in the subset of information known to the participants, one side has won and the other has lost an equal amount causing this to be a zero-sum game. (Where the stock does not increase or decrease the game can be considered a push).

This zero-sum trading works if regardless of the number of porticipants in the market. Since all trades are (or can be reduced to) two way.
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08/10/2002 10:23 PM by name withheld; then aren't all trades zero sum?
"Because of this, I think that a game begins with any transaction where the subsequent gains captured by one party (i.e. gains by the buyer or losses avoided by the seller) are equal to the losses realized by the other (i.e. losses by [View full text and thread]

08/01/2002 07:10 AM by John Lofton; You Can Bet Your As It's A Zero Sum Game
The stock market has been set up and maintained for one purpose, for big fish to eat the little fish. This doesn't mean some little fish don't make money, but far, far more get eaten. This is not a simple "me against the house" game, [View full text and thread]

02/15/2002 08:35 PM by Wreckerbill; oops... here is the full text
Itís a juggling game, not like a single clown juggling many items. It is like a rock concert crowd and a single beach ball. (The players all paid to get in and participate in the show.) As interest and effort swells, the beach ballís [View full text and thread]

02/15/2002 08:09 PM by Wreckerbill; Yes!
Go easy on my first post :) I think my view of the stock market is much more fun. (check out the full text) [View full text and thread]

12/02/2001 05:03 AM by nico; consider productivity increases
assuming the stock market has a relation with the real world out there, it should not be a zero sum game, because productivity can increase. if productivity increases, more is produced for each input, thus *really* increasing the wealth [View full text and thread]

12/02/2001 02:18 AM by name withheld;
I don't believe that stock markets are not a zero sum game. As long as there is someone who is willing to accept a high risk security in return for a higher expected return both the buyer and seller are better off. This kind of risk [View full text and thread]

05/29/2000 09:44 PM by name withheld; Click on the thread for a discussion of this
See the existing discussion. [View full text and thread]

05/24/2000 11:44 AM by Tom; Is the Stock Market a zero sum game?
My professor and I are disagreeing on this subject. I believe that while the commoditiy markets are a zero sum game, the stock markets are not. He believes that both are zero sum games. Any comments or simple ways to prove or [View full text and thread]

01/26/2000 08:01 PM by David K. Levine; I agree that it is not
To concur with the previous answer, I think that most economists would not regard the stock market as a zero-sum gain. It is true that trading just for capital gains has this property: but we also hold stocks in order to save and in [View full text and thread]

01/26/2000 04:24 PM by kim lee; No
It is trivial to observe one person's monetary gain is another's loss. But there can still be a net gain in utility (welfare). When I buy homeowner's insurance my insurance company makes an actuarial profit, but I am still better [View full text and thread]

01/26/2000 09:36 AM by name withheld; Is the stock market a zero sum game?
I assert, based on intuition and a vague proof of sorts resulting from a hypothetical game I constructed, that equity securities markets are zero-sum games. I suggest that the changes in wealth associated with a particular lot [View full text and thread]