In Game Theory, a zero sum game is a Mathematical representation of a scenario whereby each player’s gain or loss of utility is exactly balanced by the losses or gains of the utility of the other participants. (In layman’s term, I gain at your loss and vice versa.)
You will invest into a FI (financial instrument) because you believe that it will yield you gains.
Similarly, your seller sold it to you because he believes that holding on to it will yield him losses (or he found an instrument that would yield him better gains compared to the one that he is currently holding)
Since we have a willing payer and a willing seller, how did this become a zero sum game?
The answer lies in the perception that the FI does not generate value.
A trader disregards the overall viability of a FI and looks mainly at the price and buying patterns to identify trends to make a profit. He does not care if it is a bubble, as long as there are signs of a buying momentum; he will aim to buy and sell before the buying momentum subsides. In this case, it would resemble a zero sum game because the potential buyer would have been able to buy this FI at the lower price if the trader did not exist.
However, it is simply not true to assume that all FIs do not generate value. FIs such as stocks represents ownership to a company, which in turn generates profits. Hence the perceived value of a stock increases when one takes into account these profits. In such a scenario, I would not consider it to be a zero sum game. The difference here would depend in the way that valuation is done by each individuals, and the time frame they consider to hold the FI.
Hence to answer the question ‘Is investing is a zero sum game’, the answer differs if you are an Investor, or a Trader.
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