Is Investing a Zero-Sum Game?

Adam Sarhan |

Websters Dictionary defines a zero-sum game as: a game in which the sum of the winnings and losses of the various players is always zero. Origin: 1940–45

Myth: Investing IS a Zero-Sum game

Wall Street in and of itself is filled with countless “myths”  largely because so many people, even the so-called professionals, simply do not understand it. One of these myths is that investing is a zero-sum game  and we would argue that this is simply not the case. Bud Fox and Gordon Gekko, the infamous characters from the 1987 classic “Wall Street,” even discussed it:

Bud Fox: How much is enough?
Gordon Gekko: It’s not a question of enough, pal. It’s a zero sum game, somebody wins, somebody loses. Money itself isn’t lost or made, it’s simply transferred from one perception to another.

Why Investing is NOT Zero-Sum Game

The simple reason why investing is not a zero-sum game is because the number of participants and the amount of money are constantly changing.

Chess is a zero-sum game: Each individual match is zero sum, with one winner and one loser. Also, the number of players and pieces are fixed, not variable.

Wall Street and Other Capital Markets are not zero-sum games because the number of participants and amount of money are constantly changing. Further, since you are not buying and selling from the same person there are countless examples where both parties can “win” from opposite transactions. One person can be covering a short position for a profit by “buying” the shares back while the other person can be covering a long position for a profit by “selling” the same shares. There are countless other examples we can give to support our thesis (millions of people enter/exit the market each year, new funds are constantly deposited and withdrawn from the market, wealth is created/destroyed depending on new IPO’s,  gaps, bankruptcies, etc…) but we believe our point is made.

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DISCLOSURE: The views and opinions expressed in this article are those of the authors, and do not represent the views of equities.com. Readers should not consider statements made by the author as formal recommendations and should consult their financial advisor before making any investment decisions. To read our full disclosure, please go to: http://www.equities.com/disclaimer

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