Zero Sum games

[arabianights]

Hi Jon,

IPO price is 10, 10 shares issued, 10 people buy 1 share each and someone offers 20 to take the company private and off the board. Now, 10 people make 10 each because someone pays them 20 to get their shares:

Investors: total gain = 100

Buyer: total cost = 200

Company owner = -100 because he sold the shares to investors.

Since the company is valued at 200, the amount the buyer paid, this means that the owners who issued shares lost 100.

Result: owners+investors = zero-sum

According to basic economics, the owners lost money because they sold something valued at 200 for only 100.

This will explain to you why recent IPOs are issued above market value. This makes sure owners never lose money in the zero sum game.

It is simple economics. I wonder why people still debate the obvious. When you measure trading gain/losses with respect to an underline value or index (in my example the value the buyer calculates) trading and investing is zero sum.

Bill

That's double entry accounting, not a zero sum game!

 

[intradaybill]

That's double entry accounting, not a zero sum game!

Not at all, you must know that in the economic system of the west, opportunity cost is considered real cost.

Bill

 

[Rhody Trader]

Not at all, you must know that in the economic system of the west, opportunity cost is considered real cost.

Opportunity cost is not part of the zero sum question. Zero sum is strictly a marked-to-market and/or recognized profit/loss question. If you want to bring opportunity cost in you muddle the whole picture all together to the point where a pure zero sum market like futures might not actually work out to be zero sum at all.

Going back to your claim that the 100 difference between what the company received on the initial IPO and the takeout price is a loss to the company, you make the argument that the company sold the stock below it's fair value. This seems a pretty weak declaration. How do you know the company was worth more than 100 at the IPO? Why couldn't the company have been worth that 100 and then created another 100 in value, thus making it worth 200?

 

[intradaybill]

Why couldn't the company have been worth that 100 and then created another 100 in value, thus making it worth 200?

Your questions are irrelevant to the subject. Something worths whatever a buyer is willing to pay at a specific moment. This is very fundamental to our economic system. I do not understand what you are trying to accomplish by trying to convince people that when they trade stocks (not buy-n-hold investing) they are not involved in a zero sum game. Do you actually believe that whatever is lost by those misinformed traders is worth less than what some other people make?

If it is true that whatever is lost in the game of trading is made by others, then it is also true that the game is zero-sum. Dividends are part of another game, that of holding stocks for a yield. The fact that some traders pocket dividends does not alter the fact that there is a game of trading involved which is zero sum. The additional cash flows are part of another game. Nothing prevents you from playing two or three games at once. But if you consider stocks that pay no dividend, no buy-backs and distributions then it is a zero-sum to trade those stocks. Someone else pays you to make money and someone else pockets your losses.

I wonder why some people don't get it. Is it that hard?

Bill

 

[arabianights]

Not at all, you must know that in the economic system of the west, opportunity cost is considered real cost.

Bill

Your argument, taken to where it seems to be going, is that every trade is zero-sum because of the conservation of mass-energy!

 

[intradaybill]

Your argument, taken to where it seems to be going, is that every trade is zero-sum because of the conservation of mass-energy!

You got it! Finally

In every closed system where there is no magical inflow of energy, the game is zero-sum.

Prof. L. Harris is an authority on the subject:

The Winners and Losers of the Zero-Sum Game

"Trading is a zero-sum game when measured relative to underlying fundamental values. No trader can profit without another trader losing. People trade because they obtain external benefits from trading. These benefits include expected returns from holding securities, risk reduction from holding correlated assets and gambling entertainment. "


Bill

 

[arabianights]

You got it! Finally

In every closed system where there is no magical inflow of energy, the game is zero-sum.

Prof. L. Harris is an authority on the subject:

The Winners and Losers of the Zero-Sum Game

"Trading is a zero-sum game when measured relative to underlying fundamental values. No trader can profit without another trader losing. People trade because they obtain external benefits from trading. These benefits include expected returns from holding securities, risk reduction from holding correlated assets and gambling entertainment. "


Bill

The very first sentence shows that stocks are not zero-sum!

Unless you'd argue that stocks have no fundamental value, or that it never changes.

You'll note that derivatives have no fundamental value of their own. That is why they are zero-sum (and why they're called derivatives). Stocks do. That's why they aren't.

 

[intradaybill]

The very first sentence shows that stocks are not zero-sum!

Unless you'd argue that stocks have no fundamental value, or that it never changes.

You'll note that derivatives have no fundamental value of their own. That is why they are zero-sum (and why they're called derivatives). Stocks do. That's why they aren't.

Again you confuse "stocks being zero-sum" with "trading_stocks being zero sum" Why don't you read the paper. He does not say that "No trader can profit without another trader losing except in stocks".

Bill

 

[arabianights]

Again you confuse "stocks being zero-sum" with "trading_stocks being zero sum" Why don't you read the paper. He does not say that "No trader can profit without another trader losing except in stocks".

Bill

So has the farmer who raised the cow to make me a burger lost 70p if the burger costs 80p and he was paid 10p for the meat?

And what has the cow lost?

 

[barjon]

...............In every closed system where there is no magical inflow of energy, the game is zero-sum...............


Bill

bill

In the equity market there is a magical inflow of energy - it's the new money coming in. Course, there's always that magical outflow to be worried about

cheers

jon

 

[intradaybill]

So has the farmer who raised the cow to make me a burger lost 70p if the burger costs 80p and he was paid 10p for the meat?

And what has the cow lost?

I see you read the paper

Bill

 

[arabianights]

I don't need to read the paper. Equities are not zero sum except by some metaphysical definition of zero sum. In which case everything in the universe is zero sum so the term becomes redundant.

 

[Rhody Trader]

Your questions are irrelevant to the subject. Something worths whatever a buyer is willing to pay at a specific moment. This is very fundamental to our economic system.

You're the one who said that when the company issued the stock for 100 they were doing so at less than value and that somehow they were losing 100 when the company was taken out for 200, not me.

If it is true that whatever is lost in the game of trading is made by others, then it is also true that the game is zero-sum. Dividends are part of another game, that of holding stocks for a yield. The fact that some traders pocket dividends does not alter the fact that there is a game of trading involved which is zero sum. The additional cash flows are part of another game. Nothing prevents you from playing two or three games at once. But if you consider stocks that pay no dividend, no buy-backs and distributions then it is a zero-sum to trade those stocks. Someone else pays you to make money and someone else pockets your losses.

You sound like an economist - all kinds of assumptions to make a model work. If there's no dividend, buy-back, distributions, etc. All of those things serve to add cash into (or back into) the market, which means other trades, investments, hedges or whatever "game" can be played with the money. All those "games" overlap, making the equity market one big game.

 

[intradaybill]

I don't need to read the paper. Equities are not zero sum except by some metaphysical definition of zero sum. In which case everything in the universe is zero sum so the term becomes redundant.

If you start reading and pay attention especially to those that know. like the author of the paper I provided a link to, you can clear your misunderstandings and broaden your horizons.

Bill

 

[intradaybill]

You sound like an economist - all kinds of assumptions to make a model work. If there's no dividend, buy-back, distributions, etc. All of those things serve to add cash into (or back into) the market, which means other trades, investments, hedges or whatever "game" can be played with the money. All those "games" overlap, making the equity market one big game.

No, on the contrary you sound like an economist because you make terrible assumptions to try to prove that a zero sum game everyone knows it is, it's something else. I'm a trader and I know when I lose money someone else wins it and vice versa.

You did not read the paper I posted a link to. If you read it you will understand the terminology people use when they talk about zero sum game and the fact that all these other factors that in your mind make it non zero-sum are external benefits to the game of trading. Trading is a well-defined transaction involving a buyer and a seller. This game is zero-sum. There may be external cash flows or not. One may get involved with trading because of these external factors like some people play poker knowing they will lose but they enjoy the game. This does not change the fact that trading is zero-sum game. Properties of games do not change because of external benefits some players may or may not receive.

You need to read about zero-sum games and game theory in general.

Bill

 

[arabianights]

If you start reading and pay attention especially to those that know. like the author of the paper I provided a link to, you can clear your misunderstandings and broaden your horizons.

Bill

It's because I can read and pay attention (not that I often do mind) that I can parse the first sentence of that paper correctly.

Or see section 1.2.3 of that paper for more info.

Companies' fundamental values change and therefore equities are not zero-sum. I don't see why this is hard to grasp!

 

[intradaybill]

It's because I can read and pay attention (not that I often do mind) that I can parse the first sentence of that paper correctly.

Or see section 1.2.3 of that paper for more info.

Companies' fundamental values change and therefore equities are not zero-sum. I don't see why this is hard to grasp!

I don't see why it's so hard for you to read. This is the conclusion of section 1.2.3:

"In both cases no trader can profit without some other trader losing."

You are pounding futility. Companies' fundamental values may change but at the time of a transaction the value is the same for both the buyer and the seller. Why do you resist facing the facts? Trading would be a non-zero sum game only if valuations were measurably different for buyers and sellers.

I find it hard to communicate with people who cannot understand what they read. As it is I terminate this discussion with the hope that you will face and admit the obvious, that it, -- no trader can win without some other trader losing, whether valuations change or not.

Bill

 

[nine]

I buy a contract at 1000 from an investor who's cashing up his profits as it starts an intraday rise. I sell it at 1020 as I think its topping out. A friend who trades countertrend sells short and happens to get my contract. Back at 1010 he sells.

We all profited. We bathed it the warm goodwill of it all and wished the fourth party good luck in his or her dance with the contract.

 

[arabianights]

Er, you both sold at 1020

 

[fifty2aces]

I buy a contract at 1000 from an investor who's cashing up his profits as it starts an intraday rise. I sell it at 1020 as I think its topping out. A friend who trades countertrend sells short and happens to get my contract. Back at 1010 he sells.

We all profited. We bathed it the warm goodwill of it all and wished the fourth party good luck in his or her dance with the contract.

In addition to arabiannights' comment, you're kind of missing the point - you can't just ignore the other traders - it's their losses that make the game zero-sum. Obviously winners can trade amongst themselves a bit, but the money for them to profit has to come from somewhere.