WEALTH AND ZERO-SUM GAMES

If you have increased your wealth, you have become richer. That means you can explore more opportunities. Maybe you have become happier. Maybe you have increased the total wealth of the world. Let’s discuss that last “maybe.” If you have increased your own wealth, does that mean the total wealth in the world has increased too? To tell you the truth, probably not to the same extent. But why? Isn’t this the very foundation of capitalism?

The problem is that some of the businesses and assets we have created are involved in zero-sum games. The basic concept of the zero-sum game is that in order for one person or group to win, some other person or group must lose. The winner wins everything that was at stake, while the loser has to pay the bills and receives nothing. Zero-sum games include gambling games; financial instruments like options, forwards, futures and insurances; harvesting scarce resources and damaging nature (in such activities, future generations will pay the price). Zero-sum games do not have zero total value; they have negative total value because the casinos, brokers or consultants involved have costs that must be paid. Also, the price that must be paid in the future may exceed the benefits received in the present.

So are you involved in zero-sum games without knowing?

Zero-sum games are all competitive games. Competition can have good effects: it can keep us focused and promote the development of skillful players – but it may also have less creative value like just reorganizing things we already have.

The opposite of competition is cooperation.  In cooperative games, 1+1 is never 2. In most cases it is <2 (less than 2), but it may become >2 (greater than 2) due to synergy among the players and resources involved.

The moral, my friends, is that only in a cooperative environment we may add value. The catch is that when people cooperate, some of them may feel the impulse to cheat. (“I’ll let them do all the hard work and then we’ll ALL SHARE the benefits.”)  Now, try to figure out how to balance that.

This explains the popularity of team sports like soccer, basketball, etc.

END OF STORY

Side note:

Sometimes zero-sum games are used by some of their participants to hedge (eliminate, insure against) a risk. Hedging a risk is theoretically a good thing to do, but it is hard to do in practice. Here are some questions that may help you understand whether it’s good to hedge certain risks:

  • To what extent must you hedge the risk?
  • By entering into this transaction, are you involving yourself in other hidden risks?
  • Does the probability of the risk occurring make the price you must pay worthwhile?

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