Zero Sum Game (ZSG)

Wednesday, October 11, 2006 | 07:04 AM
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

Wednesday, October 11, 2006 | 07:04 AM | Permalink | Comments (74) | TrackBack (4) add to | digg digg this! | technorati add to technorati | email email this post



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» In what sense are markets "positive sum"? from Interfluidity
Barry Ritholtz has a post about the zero-sum-ness of things. I think he's right from the perspective of most traders, b... [Read More]

Tracked on Oct 11, 2006 9:21:27 AM

» In what sense are markets "positive sum"? from Interfluidity
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Tracked on Oct 11, 2006 9:46:21 AM

» If Everything is Zero Sum then Nothing is Zero Sum from The Stalwart
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 [Read More]

Tracked on Oct 11, 2006 10:45:19 AM

» Economics is not a zero sum game from The Everyday Economist
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... [Read More]

Tracked on Oct 11, 2006 11:05:36 AM



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.


Posted by: Mark | Oct 11, 2006 7:54:23 AM

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