How is the stock market NOT zero-sum?

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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.

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I'm referring to your quote "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)" - you're not talking about value won or lost there. That sort of utility beyond EV is the only non-zero sum aspect of stock trading (beyond what I already mentioned, though I forgot about taxes).

[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.

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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?

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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.

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Ehh, I could argue against that as well. A massive dollar devaluation doesn't affect the zero-sumness of a poker game, because relative to one another, the parties have not gained or lost anything. At the end of a game, both sides will have the same amount of dollars.

I am not confused. In the situation I mentioned, with a GM and NTDOY game, one side can gain a monetary equivalent while the other can earn a monetary equivalent at the same time. At the end of the hand, the sides will both have more dollars.

If one player is playing with yuan and another with dollars, then it will still be a zero-sum transaction, no matter the devaluation. One side may gain a ton from devaluation, but the other will lose the same amount. It will net to zero... zero sum. 2 players playing with dollars lose nothing relative to one another.

[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.

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I'm referring to your quote "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)" - you're not talking about value won or lost there. That sort of utility beyond EV is the only non-zero sum aspect of stock trading (beyond what I already mentioned, though I forgot about taxes).

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I see. I don't know, I don't see your point, but I guess it could depend on perspective. I guess you're looking at trades as slivers of time not related to the changes in value, while I consider trading to encompass everything from stock purchase to stock sale between x parties. Like I said, your definition must be different than mine.

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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.

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Ehh, I could argue against that as well. A massive dollar devaluation doesn't affect the zero-sumness of a poker game, because relative to one another, the parties have not gained or lost anything. At the end of a game, both sides will have the same amount of dollars.

I am not confused. In the situation I mentioned, with a GM and NTDOY game, one side can gain a monetary equivalent while the other can earn a monetary equivalent at the same time. At the end of the hand, the sides will both have more dollars.

If one player is playing with yuan and another with dollars, then it will still be a zero-sum transaction, no matter the devaluation. One side may gain a ton from devaluation, but the other will lose the same amount. It will net to zero... zero sum. 2 players playing with dollars lose nothing relative to one another.

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You may want to check that math. In dollar terms, using your logic, dollar and yuan poker players will have *gained* during this game (this looks inconsistent with my assertion earlier that the value does not change - bonus points if you can figure out why [img]/images/graemlins/wink.gif[/img]. And why measure GM and NTDOY in terms of dollars, which is not part of the game?

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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.

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Ehh, I could argue against that as well. A massive dollar devaluation doesn't affect the zero-sumness of a poker game, because relative to one another, the parties have not gained or lost anything. At the end of a game, both sides will have the same amount of dollars.

I am not confused. In the situation I mentioned, with a GM and NTDOY game, one side can gain a monetary equivalent while the other can earn a monetary equivalent at the same time. At the end of the hand, the sides will both have more dollars.

If one player is playing with yuan and another with dollars, then it will still be a zero-sum transaction, no matter the devaluation. One side may gain a ton from devaluation, but the other will lose the same amount. It will net to zero... zero sum. 2 players playing with dollars lose nothing relative to one another.

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You may want to check that math. In dollar terms, using your logic, dollar and yuan poker players will have *gained* during this game (this looks inconsistent with my assertion earlier that the value does not change - bonus points if you can figure out why [img]/images/graemlins/wink.gif[/img]. And why measure GM and NTDOY in terms of dollars, which is not part of the game?

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I don't agree with that... you can see why if you split the 'games' into their respective zero sum components. Currency trading is a zero-sum game, as is poker. The only way to make it seem like they are not zero-sum games is if, say, in the example you think that both parties gain or lose, you ignore the theoretical parties holding the counter-currency losing or gaining value, those that aren't in the poker transaction.

On the other hand, with stocks, the fundamental value of the security is changing in value, so both parties can gain (and not lose, because of the risk-free rate factor that was mentioned earlier). In stocks, there is no equivalent theoretical 'counter party' that loses when a stock goes up. Value is created, positive sum.

[Phone Booth]

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


[/ QUOTE ]

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.

[/ QUOTE ]

I'm referring to your quote "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)" - you're not talking about value won or lost there. That sort of utility beyond EV is the only non-zero sum aspect of stock trading (beyond what I already mentioned, though I forgot about taxes).

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I see. I don't know, I don't see your point, but I guess it could depend on perspective. I guess you're looking at trades as slivers of time not related to the changes in value, while I consider trading to encompass everything from stock purchase to stock sale between x parties. Like I said, your definition must be different than mine.

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No, I'm looking at the entire chain of events (note that it's easy to prove that a zero-sum game played multiple times is still a zero-sum game). It doesn't matter how many times the shares change hands and it doesn't matter how much time passes - you have the same number of shares outstanding and the same amount of cash. None of these transactions affects the value of the papers being traded. If you stop thinking of currency as a measure of value (since dollar at time X is mostly certainly not the same thing as dollar at time Y), it becomes self-evident.

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No, I'm looking at the entire chain of events (note that it's easy to prove that a zero-sum game played multiple times is still a zero-sum game). It doesn't matter how many times the shares change hands and it doesn't matter how much time passes - you have the same number of shares outstanding and the same amount of cash. None of these transactions affects the value of the papers being traded. If you stop thinking of currency as a measure of value (since dollar at time X is mostly certainly not the same thing as dollar at time Y), it becomes self-evident.

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I'm looking at underlying value. Shares represent ownership of real assets, and these assets increase in time (hopefully) as a company does business. That's why shares go up in value, and that's the underlying reason for why it's not zero sum.

I really suck at explaining things, btw.

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I don't agree with that... you can see why if you split the 'games' into their respective zero sum components. Currency trading is a zero-sum game, as is poker. The only way to make it seem like they are not zero-sum games is if, say, in the example you think that both parties gain or lose, you ignore the theoretical parties holding the counter-currency losing or gaining value, those that aren't in the poker transaction.

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If you denominate the currency trading in a single currency, there certainly can be net change in value. If you start with 1 euro and I start with 1 dollar and we exchange it when 1 euro = 1 dollar, we have two dollars total. If the exchange rate changes such that euro/dollar = 1.5, then we have 2.5 dollars. In this respect, there's no difference between currency trading and stock trading. Whether dollar lost value or euro gained value is moot just as in stock trading.

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On the other hand, with stocks, the fundamental value of the security is changing in value, so both parties can gain (and not lose, because of the risk-free rate factor that was mentioned earlier). In stocks, there is no equivalent theoretical 'counter party' that loses when a stock goes up. Value is created, positive sum.

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The fundamental values of currencies are always changing as well. What you're forgetting is that the value created here has nothing whatsoever to do with the transaction and thus is entirely external to the "game" at hand. That is really the key point (everything else I'm bringing up is an attempt to show why that is the correct way to look at things and how assuming otherwise trivializes the whole abstraction of zero-sum game). I'd also argue, aside from this, that the idea that stocks always go up over time is extremely dangerous. It seems to have been invented to justify gambling with stocks or for investment managers to push various dubious products.

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What you're forgetting is that the value created here has nothing whatsoever to do with the transaction and thus is entirely external to the "game" at hand. That is really the key point (everything else I'm bringing up is an attempt to show why that is the correct way to look at things and how assuming otherwise trivializes the whole abstraction of zero-sum game).

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Yep, I know... that's what I meant when I said it's a matter of our differing perspectives. I think that value change is very relevant to the "game" of trading, that the trade doesn't end like a hand of poker right after the transaction, in the determination of zero or positive sum.

However, the cases that you brought up trivializing the game don't really trivialize it for me. Many of the cases you brought up were zero sum after I looked at them.

As for stocks continuing to rise, I'm just basing that on value creation businesses do every day, and at least the risk free rate that is required of securities.

I also propose to end this argument because we are both very stubborn. [img]/images/graemlins/wink.gif[/img]

[UrmaBlume]

There are many instances where the equity markets DO NOT represent a zero sum game.

While most trading represents zero sum activity you must remember how the shares came onto the market in the first place. Mostly they became tradeable via IPOs' and those are most definitely NOT zero sum transactions.