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GREHERT@xxxxxxx wrote:
> Let's talk about the concept of a Zero Sum game. The implication is that for
> every Dollar won, there is a Dollar lost.
Not exactly. What is meant by this (in terms of economics) is that the net effect
on wealth is zero. Therefore, what is taking place is simply an exchange of money
between parties. This would include any transaction costs that are involved. In
other words, within the set of participants, the aggregate capital committed to
the enterprise does not change through trading.
> The stock market on the other hand is not a zero sum game. It averages 10%
> per year apprectiation, which I guess makes it a "10% Sum game" (long) and a
> "-10% Sum game" (short).
This would still be "zero-sum," though. What is changing is capitalization.
Let's say A buys an IPO for $10. He sells it to B for $20. Who in turn sells it
to C for $30. Leaving aside transaction costs, the total net profit among our
group is $20. Yet the effect on wealth is still zero - the profit has resulted
from a $20 increase in capitalization.
However, even though A and B have made a profit, it hasn't been at anyone's
expense. If C sells his stock for $20 to D, and loses $10, neither A, B, or D
have gained from this loss. We assume that C was more than happy to sell it at
this point (not willing to incur further losses), and D was happy to take his
chances on it rebounding. Therefore, it isn't a matter of making profits on the
"backs" of other participants - it would be instead a matter of forsaken
*potential* gains or losses - e.g. - A's selling at $20 instead of at the high of
$30, etc. Whenever we buy or sell, we or the other party may or may not benefit
from the transaction, depending on future circumstances.
Regards,
A.J.
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