How is the stock market NOT zero-sum?

[skindog]

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I don't think anyones nailed it yet.

Stocks have a theoretical value that appreciates.

However, stock buying, trading, holding, whatever, in the practical sense, is very much zero sum.

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If you buy a stock at 10 and sell it to me at 15 and I sell it at 20, who has lost our gain? No one, that is why stocks is not a zero sum game. Those that sold lost the opportunity cost of more gain but they did not neccesarily lose money.

The reason this is so is that there is no finite expiration date or settlement date for all holders as there is for options and futures. The company who originally issued shares is never going to have to go back in and buy all those shares back at a fixed date. If they did stocks would become a zero sum game as the issuing company's gain or loss would be offset by the gain or loss from market participants. Since their is no forced setlement of shares a minority trading of shares determines the percieved net worth of all market participants. Which is theoretical because not all holders can immediately sell at the current market price.

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I don't see how this is related to zero sum, it sounds like you're talking about value.

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You must have a different definition of zero sum than I do.

Wikipedia says:
In game theory, zero-sum describes a situation in which a participant's gain or loss is exactly balanced by the losses or gains of the other participant(s). It is so named because when the total gains of the participants are added up, and the total losses are subtracted, they will sum to zero.

I says:
In options markets, for every options contract that is traded, one side's losses at the end are equivalent to the other side's gains at the end. -commissions, so actually negative sum. In stocks, there is no such thing because the underlying value increases. Yes, we're talking about value, but zero-sum is concerned with value: the key is it's possible for everyone to come out on top, whereas this sort of thing is not possible in a zero sum or negative sum situation.

That or I'm missing something, but I think you guys are nitpicking to the point of confusion.

[Phone Booth]

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Wikipedia says:
In game theory, zero-sum describes a situation in which a participant's gain or loss is exactly balanced by the losses or gains of the other participant(s). It is so named because when the total gains of the participants are added up, and the total losses are subtracted, they will sum to zero.

I says:
In options markets, for every options contract that is traded, one side's losses at the end are equivalent to the other side's gains at the end. -commissions, so actually negative sum. In stocks, there is no such thing because the underlying value increases. Yes, we're talking about value, but zero-sum is concerned with value: the key is it's possible for everyone to come out on top, whereas this sort of thing is not possible in a zero sum or negative sum situation.

That or I'm missing something, but I think you guys are nitpicking to the point of confusion.

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Say I have 200 shares of GS and you have $40,000. We exchange our assets. Now you have 200 shares of GS and I have $40,000. Regardless of what happens to the value of GS or the value of US dollars, we together have 200 shares of GS and $40,000. The sum total gains or losses from this transaction is exactly zero, minus transaction costs. This is true as long as what happens to the value of GS shares or US dollars is outside our control.

[Mark1808]

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I don't think anyones nailed it yet.

Stocks have a theoretical value that appreciates.

However, stock buying, trading, holding, whatever, in the practical sense, is very much zero sum.

[/ QUOTE ]


If you buy a stock at 10 and sell it to me at 15 and I sell it at 20, who has lost our gain? No one, that is why stocks is not a zero sum game. Those that sold lost the opportunity cost of more gain but they did not neccesarily lose money.

The reason this is so is that there is no finite expiration date or settlement date for all holders as there is for options and futures. The company who originally issued shares is never going to have to go back in and buy all those shares back at a fixed date. If they did stocks would become a zero sum game as the issuing company's gain or loss would be offset by the gain or loss from market participants. Since their is no forced setlement of shares a minority trading of shares determines the percieved net worth of all market participants. Which is theoretical because not all holders can immediately sell at the current market price.

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I don't see how this is related to zero sum, it sounds like you're talking about value.

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A zero sum game occurs when you have a fixed settlement at a fixed date where anyone who created a long or short position must settle up. This means at some point ALL market participants must offset their transcation resulting in a zero sum game. In stocks their is no fixed settlement or expiration at which time ALL holders must settle their positions.

Just think of a simple example of acompany issuing 1 million shares at $10 who must cover (buy back) that position in one year. If they buy back at $15, they lost $5 million and the buyers made $5 million. The company and its value is a seperate issue, in terms of the stock trading of that company you would have had a zero sum game.

Now take the case where they don't have to buy back. One year from now several thousand shares have traded the price up to $15. As a whole buyers are up $5 million and no one has to ever buy back in that original position that was sold to the public so their is no offsetting stock loss.

[skindog]

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Wikipedia says:
In game theory, zero-sum describes a situation in which a participant's gain or loss is exactly balanced by the losses or gains of the other participant(s). It is so named because when the total gains of the participants are added up, and the total losses are subtracted, they will sum to zero.

I says:
In options markets, for every options contract that is traded, one side's losses at the end are equivalent to the other side's gains at the end. -commissions, so actually negative sum. In stocks, there is no such thing because the underlying value increases. Yes, we're talking about value, but zero-sum is concerned with value: the key is it's possible for everyone to come out on top, whereas this sort of thing is not possible in a zero sum or negative sum situation.

That or I'm missing something, but I think you guys are nitpicking to the point of confusion.

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Say I have 200 shares of GS and you have $40,000. We exchange our assets. Now you have 200 shares of GS and I have $40,000. Regardless of what happens to the value of GS or the value of US dollars, we together have 200 shares of GS and $40,000. The sum total gains or losses from this transaction is exactly zero, minus transaction costs. This is true as long as what happens to the value of GS shares or US dollars is outside our control.

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Like I said... nitpicking to confusion. I believe you have to take the whole transaction into account, throughout a time frame, and not just a sliver of time as you are saying.

But even in your case, you sold the GS shares because they no longer provided perceived benefit to you relative to what you're getting. (diversification, ownership gets your jollies off, whatever)

Sorry to quote wikipedia, but:
Many economic situations are not zero-sum, since valuable goods and services can be created, destroyed, or badly allocated, and any of these will create a net gain or loss. Assuming the counterparties are acting rationally, any commercial exchange is a non-zero-sum activity, because each party must consider the goods s/he is receiving as being at least fractionally more valuable to him/her than the goods he/she is delivering. Economic exchanges must benefit both parties enough above the zero-sum such that each party can overcome his or her transaction costs.

[Phone Booth]

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A zero sum game occurs when you have a fixed settlement at a fixed date where anyone who created a long or short position must settle up. This means at some point ALL market participants must offset their transcation resulting in a zero sum game. In stocks their is no fixed settlement or expiration at which time ALL holders must settle their positions.

Just think of a simple example of acompany issuing 1 million shares at $10 who must cover (buy back) that position in one year. If they buy back at $15, they lost $5 million and the buyers made $5 million. The company and its value is a seperate issue, in terms of the stock trading of that company you would have had a zero sum game.

Now take the case where they don't have to buy back. One year from now several thousand shares have traded the price up to $15. As a whole buyers are up $5 million and no one has to ever buy back in that original position that was sold to the public so their is no offsetting stock loss.

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Why stop there? Shouldn't the US government also offer to buy back the US dollars for some sort of fixed-value asset? First, you are way too fixated upon US dollars as a measure of value. Second, none of those trades have any bearing on the total value - if you play poker with stock certificates, does the game suddenly become non zero sum?

[Grizwold]

Hi Tickner,

People are all over the place in this post, and I think a lot of it is due to 'Poker Think'. You say,

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Perhaps I play too much poker.

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I think most people in this post make too many comparisons between the stock market and poker. Unfortunately people refer to the stock market as a game, likening it to poker. I've heard comparisons between poker and investing very often, but I think they are not alike at all. Perhaps the biggest difference is that there is no risk-free rate in poker and other zero-sum games. In the complete thread about Differences Between Poker and the Stock Market, risk-free rate is not mentioned once.

DcifrThs illustrates the importance of risk-free rates in stock investing,

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to buy and hold a stock, it must offer a return above the "risk free rate,"

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Calculating the intrinsic value of a stock not only involves the future dividends or free cash flow, but also the risk-free rate (when calculating the required rate of return). Stock market appreciation is not just a product of a reinvestment theory or greater fool theory.

Clark

[skindog]

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A zero sum game occurs when you have a fixed settlement at a fixed date where anyone who created a long or short position must settle up. This means at some point ALL market participants must offset their transcation resulting in a zero sum game. In stocks their is no fixed settlement or expiration at which time ALL holders must settle their positions.

Just think of a simple example of acompany issuing 1 million shares at $10 who must cover (buy back) that position in one year. If they buy back at $15, they lost $5 million and the buyers made $5 million. The company and its value is a seperate issue, in terms of the stock trading of that company you would have had a zero sum game.

Now take the case where they don't have to buy back. One year from now several thousand shares have traded the price up to $15. As a whole buyers are up $5 million and no one has to ever buy back in that original position that was sold to the public so their is no offsetting stock loss.

[/ QUOTE ]

Why stop there? Shouldn't the US government also offer to buy back the US dollars for some sort of fixed-value asset? First, you are way too fixated upon US dollars as a measure of value. Second, none of those trades have any bearing on the total value - if you play poker with stock certificates, does the game suddenly become non zero sum?

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A key distinction is also that in a game like poker, the transaction ends instantly when the hand ends. Stock can be held for a long time and thus can fluctuate in value. Everyone benefits.

If you played poker with stock certificates, the parties would transact value instantly - the 'game' ends when the hand ends. Now, if we played poker where I had stocks of GM and you had stocks of NTDOY, and the value fluctuated throughout the hand after we put the bets in but before we finished the hand, then yes, it would not be a zero sum game.

After the hand would be over, we'd walk away from the game, and enter a positive sum game that is stock ownership/trading.

[Phone Booth]

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Say I have 200 shares of GS and you have $40,000. We exchange our assets. Now you have 200 shares of GS and I have $40,000. Regardless of what happens to the value of GS or the value of US dollars, we together have 200 shares of GS and $40,000. The sum total gains or losses from this transaction is exactly zero, minus transaction costs. This is true as long as what happens to the value of GS shares or US dollars is outside our control.

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Like I said... nitpicking to confusion. I believe you have to take the whole transaction into account, throughout a time frame, and not just a sliver of time as you are saying.

But even in your case, you sold the GS shares because they no longer provided perceived benefit to you relative to what you're getting. (diversification, ownership gets your jollies off, whatever)


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But by that definition, nothing is ever zero-sum, not even rake-free poker.

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Sorry to quote wikipedia, but:
Many economic situations are not zero-sum, since valuable goods and services can be created, destroyed, or badly allocated, and any of these will create a net gain or loss. Assuming the counterparties are acting rationally, any commercial exchange is a non-zero-sum activity, because each party must consider the goods s/he is receiving as being at least fractionally more valuable to him/her than the goods he/she is delivering. Economic exchanges must benefit both parties enough above the zero-sum such that each party can overcome his or her transaction costs.

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This quote is true in that if you know that your counterparty knows the exact value of the stock you're buying or selling, you shouldn't engage in the transaction, just as you shouldn't play poker if we knew our opponents played perfectly. But they don't, so you gamble.

[skindog]

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But by that definition, nothing is ever zero-sum, not even rake-free poker.


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No. In an economic transaction, both sides can benefit, but in a poker transaction, one side gains, the other loses, but the sum is equal.

[Phone Booth]

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A zero sum game occurs when you have a fixed settlement at a fixed date where anyone who created a long or short position must settle up. This means at some point ALL market participants must offset their transcation resulting in a zero sum game. In stocks their is no fixed settlement or expiration at which time ALL holders must settle their positions.

Just think of a simple example of acompany issuing 1 million shares at $10 who must cover (buy back) that position in one year. If they buy back at $15, they lost $5 million and the buyers made $5 million. The company and its value is a seperate issue, in terms of the stock trading of that company you would have had a zero sum game.

Now take the case where they don't have to buy back. One year from now several thousand shares have traded the price up to $15. As a whole buyers are up $5 million and no one has to ever buy back in that original position that was sold to the public so their is no offsetting stock loss.

[/ QUOTE ]

Why stop there? Shouldn't the US government also offer to buy back the US dollars for some sort of fixed-value asset? First, you are way too fixated upon US dollars as a measure of value. Second, none of those trades have any bearing on the total value - if you play poker with stock certificates, does the game suddenly become non zero sum?

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A key distinction is also that in a game like poker, the transaction ends instantly when the hand ends. Stock can be held for a long time and thus can fluctuate in value. Everyone benefits.

If you played poker with stock certificates, the parties would transact value instantly - the 'game' ends when the hand ends. Now, if we played poker where I had stocks of GM and you had stocks of NTDOY, and the value fluctuated throughout the hand after we put the bets in but before we finished the hand, then yes, it would not be a zero sum game.

After the hand would be over, we'd walk away from the game, and enter a positive sum game that is stock ownership/trading.

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Dollars can be held for a long time and can fluctuate in value. If there's a massive dollar devaluation during a hand of poker, does that make the game of poker non zero sum? No matter which unit of value you use to measure value, as long as you don't introduce external units, note that a transaction-cost-free stock market with no change in float results in net zero P&L. You're confusing the issue with the time value of money and the fact that price does not equal value.