Zero-Sum Game: Definition, Meaning, Examples in Financial Markets and Business, Game Theory

Zero-sum is a concept often used in game theory, which states that one person’s gain is equivalent to another’s loss. In other words, the net change in wealth or benefit for all participants of the game remains zero.

Zero-sum games can have as little as two players or millions of participants and are commonly seen in financial markets such as options and futures trading where every participant’s gains must be balanced by an equal amount of losses from others involved.

Add your business to our business directory https://harbourfronts.com/directory/ Add your business. Also check out other businesses in the directory

What is a Zero-Sum Game

A zero-sum game is a situation in which one person’s gain is equal to another person’s loss; the net change in wealth or benefit for all participants is zero. This term is often used when discussing game theory and other business or trading scenarios.

In order for a zero-sum game to exist, the total of all gains must be equal to the total of all losses. This is known as the zero-sum principle and it means that if one person gains, another must lose an equal amount.

In simple words, it can be said that in a zero-sum game, the gains of one player are matched exactly by the losses of another. The total amount won or lost is always zero.

How Zero-Sum Game Works

Zero-sum games are commonly seen in financial markets such as options and futures trading. In this case, the gains of one trader must be matched by equal losses from another trader.

It is important to remember that transaction costs and fees typically reduce the overall gain or loss made by each player involved. This means that a zero-sum game is often not truly zero-sum as there are costs associated with the transactions.

This means that in a zero-sum game, the total amount won or lost by all participants combined is always zero. Even when one person gains an advantage, there will be someone else who loses an equal amount.

Zero-sum games are often used in game theory and business scenarios as a way to analyze risk-reward ratios and make decisions on strategy. By understanding how a zero-sum game works, it is possible to make more informed decisions and maximize chances of success.

Example of Zero-Sum Games

Here’s an example of a zero-sum game: two participants agree to a bet that involves flipping a coin. One player wins $1 if the coin lands on heads and the other player lose $1 if it lands on tails.

In this example, both players are taking an equal risk and the total amount of money (or benefit) in play is fixed at $1. If the coin lands on heads, then one player wins $1 and the other player loses $1; a net gain of zero.

The same thing can be said for a stock market scenario. If one trader buys a certain amount of shares and another trader sells the same amount of shares, then the net gain or loss for both traders is zero.

This example highlights how in a zero-sum game, one person’s gain must always be matched by an equal loss from another participant.

Conclusion

Zero-sum games are situations where one person’s gain is equal to another person’s loss. This means that the net change in wealth or benefit for all participants of the game remains zero. By understanding how a zero-sum game works, it is possible to make more informed decisions and maximize chances of success.

Further questions

What's your question? Ask it in the discussion forum

Have an answer to the questions below? Post it here or in the forum

LATEST NEWS‘Enough pollution’ in low-income NJ area with 1 power plant
‘Enough pollution’ in low-income NJ area with 1 power plant

WOODBRIDGE, N.J. (AP) — Residents of low-income communities in New Jersey that would get a second gas-fired power plant nearby are urging the governor to halt the project, which they said flies in the face of an environmental justice law he signed with great fanfare…

Stay up-to-date with the latest news - click here
LATEST NEWSAbsolute Software to Present at Raymond James Annual Institutional Investors Conference
Absolute Software to Present at Raymond James Annual Institutional Investors Conference

VANCOUVER, British Columbia & SAN JOSE, Calif. — Absolute Software™ (NASDAQ: ABST) (TSX: ABST), the only provider of self-healing, intelligent security solutions, today announced the company will present at the Raymond James 44th Annual Institutional Investors Conference on Wednesday, March 8, 2023 at 11:35 am…

Stay up-to-date with the latest news - click here
LATEST NEWSUS pick to head World Bank, ex-Mastercard CEO Banga, starts ‘charm offensive’
US pick to head World Bank, ex-Mastercard CEO Banga, starts ‘charm offensive’

WASHINGTON, March 1 (Reuters) – U.S. President Joe Biden’s pick to head the World Bank, ex-Mastercard CEO Ajay Banga, met on Wednesday with executive directors at the bank as he launched a “charm offensive” to win the post, sources familiar with the plans said. Biden…

Stay up-to-date with the latest news - click here
LATEST NEWSSnowflake and AWS Significantly Deepen Commitment to Driving Customer-focused Innovation
Snowflake and AWS Significantly Deepen Commitment to Driving Customer-focused Innovation

Snowflake and AWS expand their successful partnership by boosting sales collaboration, industry solution alignment, and joint go-to-market strategies Over 6,000 joint customers1 including Goldman Sachs and other Fortune 500 enterprises, are using Snowflake and AWS to rapidly innovate Approximately 84% of Snowflake’s customers run their…

Stay up-to-date with the latest news - click here
LATEST NEWSNew Grain February Record Set
New Grain February Record Set

Improved grain industry collaboration leads to shipping record MONTREAL, March 01, 2023 (GLOBE NEWSWIRE) — CN (TSX: CNR) (NYSE: CNI) today announced that February 2023 was the best February ever for Western Canadian grain movement on CN’s network. The Company worked with its customers and…

Stay up-to-date with the latest news - click here

Leave a Reply