I've seen it mentioned in a negative way that trading is zero sum game, that in order to win someone has to lose. I don't agree with this for two reasons. First of all, not every win is a direct loss. You may be buying from someone who is closing out a profit, or selling to someone who is buying for the long term. And secondly, this is no different than success in any profession. If someone is looking for a plumber, and they see your ad on Google instead of a competitor's, that means you took profit that they would have had. Everyone is competing. In plumbing, those that advertise well, have competitive pricing, and good service, win the money. Those that are not as good lose, or make less. So too in trading, those with the correct systems, approach etc. win the money. Those with ineffective systems and impulses lose. I don't see how it's any different, or something to feel guilty about.
Too many flaws. For investing zero sum is pegged to an index. So if SP returns 15% and you did 10% you are a loser. This part is somewhat similar to the plumber argument but only to a very small degree. Yes the SP does return 7% long term average. But the volatility is too high to compare to plumbing. The other problem is most people don’t have a big enough base. If plumber makes $50k a year that is like someone invest $1m in a bond with 5% coupon. How many people have $1m invested in securities? For short term trading the 7% return is irrelevant and it is a true zero sum game. Actually negative sum if you count commissions and slippage. A complete waste of time as for retail traders it is a massive negative sum game. Working as plumber is much better knowing you will make $200 if you go to work today. Need to think thru things logically. Trading is all about logic.
Didn't you just refute your argument here? I think a non-zero sum game would be, those with correct systems win, and those with incorrect systems win too ! Everybody wins ! Example: non-zero sum game. Everybody puts in $1. Everybody wins. Everybody gets back their $1. Zero-sum game: Everybody puts in $1. Half win, half lose. Half get back $2, half get back $0.
I wasn't so clear about my point. I agree it's a zero sum game. I am taking issue with the fact that it's mentioned to be this evil thing that only exists in trading and not in "regular" jobs. And that it's something to feel guilty about.
That's not really true. A short-term trader is a provider of liquidity for the long-term investors (or for other, longer-term traders), so it becomes a waterfall-like structure were every step is exposed to the overall return of the market, but to a lesser degree. That's only true because of the rent-seeking by the plumbing unions, licenses and all. Elsewhere in the world plumbing is a pretty low grade profession and it, as per my contractor friend, is going down that road here in the US too. Granted, ROC for a trade is probably as good as you can get, but you can't eat ROC. A guy working in a bodega on my corner takes home $15/hour on zero investment making his return on capital infinite, but somehow I don't see people lining up to be him
That's it. That's the whole story. All else is fiction, made-up, fairy tale. People on ET routinely drop "zero-sum game" thinking it means something which it does not. There is also a negative-sum game (like, cutting up the Mona Lisa for prizes) and a positive-sum game (whereby, synergies mean that the very playing of the game puts the players ON NET ahead). Maybe that's what people should keep in mind: it's really NET-Zero-Sum NET-Positive-Sum and NET-Negative-Sum... As well, individual trades are one-round games and zero-sum by construction. But a market is (by construction) a *tournament* where the same game is repeated in a structure which recognizes previous rounds and the likelihood of future rounds. Here, positive-sum paths (where the playing of the game leads to increased value with each round) and negative sum games( where the playing of the game *decreases* the grouped value with each round) are things which we witness every day.
The asset markets is not a zero-sum by construction, as it (eventually) allows for risk transfer between interested parties (buyer wants a higher return, so he buys an asset, seller wants to reduce his risk so he sells). The only true zero-sum markets are derivatives, but even there the players are exposed to a non-zero-sum outcome because of the interactions of the markets with the asset markets.
Let's say 4 people are at a table. 2 of the people have oranges and 2 of the other people have money. The first person with the orange says, I want to sell this for 1 dollar. So one person buys it for a dollar. The other person with the orange says I want to sell mine for 2 dollars. So he sells it to the last person with money for 2 dollars. The first person who bought their orange for 1 dollar is a winner for getting the cheapest deal, and the person who sold the 1 dollar orange is a loser for not selling at the highest price. The second person who bought the orange for 2 dollars is a loser for not getting the best deal, and the person who sold the 2 dollar orange is a winner for selling at the highest price. Yeah, I think the zero sum game thing is correct. Even though we may not think we are losers, in the big picture we really are. The people who buy at the cheapest rates are winners and the people who sell the cheapest rates are losers and vice versa.
You are drawing a distinction without a difference. Any differences between asset ownership and derivative ownership are priced into the trade -- the mechanics (whether individual trades or tournament repeats) are the same. Further, asset markets and derivative markets both exhibit zero-sum arithmetic in individual trades, and the potential for additive/subtractive artifacts in repeat/tournament play.
They only do so because of the interaction with the asset market - i.e. without an ability to collapse the arbitrage relationship, the two could be wildly disconnected. Nope. An asset either already produces income or is expected to do so in the future. So when you are buying an asset, you are interacting with the real economy. That interaction makes the asset market a non-zero-sum game. A zero-sum game by definition has the total expectation across all participants equal to zero. It's pretty easy to see how that is not true with assets - this is not my theory, it's economics 101.