Glossary – Zero-Sum Game

Definition

An economic situation, with at least two parties involved, in which one party’s gain is equal to the other party’s loss. As a result the overall change in wealth is zero.

Example

An example of a zero-sum game is options trading. Assume you buy a call option from a bank for shares that currently sell at $50. After one week the shares sell at $60, so you use the option to buy the shares (from the bank) at $50 and resell them immediately at $60. In this situation you make a profit of $10 per share. However, the bank loses the same amount of money, because it has to sell the shares for less than they are currently worth. So the overall profit is zero.

Relevance

Zero-sum games are an essential part of game theory. It is important to note that they are essentially nothing more than bets on future events. That means there is often a significant amount of risk associated with them, which is important to note before taking a decision.

Leave a Reply

Your email address will not be published. Required fields are marked *