A zero sum game is a situation or relationship between two or parties where the business they do would result in no changes in total benefit as all that is gained by one party is lost by another, resulting in balance that exist from the start.
For example in a casino, all the winnings made by a poker player would mean that another player has lost that amount. The net change in wealth is zero.
While the winner who has made money would be delighted with the windfall, there would always be a loser who accounts for the losses.
No win-win or lose-lose results can be achieve in zero-sum transactions.
Zero sum is an idea made famous by the breakthrough economic concepts of game theory.
Financial markets
In business, the term zero sum game is most often used in the financial markets where traders buy and sell shares to each other.
The price that an investor pays for shares would be the price that someone else sells it for.
Thus while the asset of value is let go by the seller, it moves to the portfolio of the buyer. So the loss of value in one’s portfolio is balanced off by it moving into the portfolio of another investor.
However, it must be noted that while this is the case, both parties of the transaction can find the trade mutually beneficial.
This is because trades are done mostly due to the performance expectation of specific counters.
With different perspectives on investment outlook and risk profiles, a seller might find it logical to let go of a stock as he expects it to decrease in share price. He might have purchased them initially at a low price anyway.
On the other hand, a buyer buys a particular counter with the prediction that it would rise in value. So at the moment of purchase, he would most probably be satisfied in acquiring those shares.
Both parties are happy with the transaction when it was done, but the real results from the trade would only be revealed in future.
Solving a zero sum game
For a zero sum game relationship between two parties, 3 solutions are often cited by economists.
- Nash Equilibrium
- Minimax
- Maximin
Out of the 3, the Nash equilibrium is probably the one that is most famous. The work of John Nash even made it to an award-winning movie in A Beautiful Mind.
The Nash equilibrium has almost legendary status in academic circles in the study of economics.
It basically states that in competitive markets, an equilibrium price and quantity is not solely determined by natural supply and demand.
It is actually highly influenced by the strategic decisions made by all players.
Corporations for example, do not simply conceptualize their business strategies based on the demand and supply in a market, but mold them according to what the competitors are doing.
And as each player creates strategies to counteract the predicted strategies of each other, the real equilibrium that plays out in the real world is usually very different than what basic equilibrium concepts determine.
