InvestorQ : What do we understand by a Zero-sum game in stock market trading?
Riya Dwivedi made post

What do we understand by a Zero-sum game in stock market trading?

Dia Deshpande answered.
3 years ago

What is a zero sum game in trading? When the profits and losses nullify each other on any average day, it is a kind of zero sum game. The argument is that in trading you eventually lose most of what you gain, although the reverse may not exactly be true. Is day trading a zero sum game? What do we understand by a zero sum game stock market? A zero sum game, in mathematics is about a game in which one person’s profit is exactly nullified by the loss of another person. So if X makes a profit of Rs.2000 then it is because Y has made a loss of Rs.2000. Zero sum game theory approach assumes that all trading is a zero sum game and therefore it just leads to a transfer of wealth from one person to the other.

As an activity it does not create value for the market or for the economy. Is that true? We can look at trading as a zero sum game from two perspectives. Firstly, does one person’s profit get nullified by another person’s loss? We can look at this question from the perspective of equity trading, futures trading and options trading. Secondly, we will also look at whether trading can add value to the market and the economy as a whole. A zero sum game essentially does not allow you to make profits for too long and it also does not add any real value to the market. The crux of the argument is that trading is not a zero sum game. Firstly, it is not entirely symmetric in nature and secondly, it is not a purely speculative activity but does play a role in vitalizing markets.