Zero Sum Game (ZSG)

I was surprised at the reaction to the Zero Sum intro yesterday. I keep forgetting there are lots of bad memes and worse ideas that have been inappropriately accepted as accurate floating around.

I am neither endorsing nor criticising zero sum; I am only acknowledging as a reality. I have found that those who refuse to acknowledge it are often trying to sell something.

Here’s the bottom line: Any finite resource is a ZSG. Even an infinite resource has only 100% of marketshare, to be divided amongst competitors. That percentage is also a ZSG.

Let’s see how some of these zero sum issues apply to different areas:

Markets: are probably the best example of a ZSG. In 2000, the Wishire 5000 was worth $1.2 trillion more than it is today. Some people bought, some people sold. Mark-to-market, there is a loss to the collective buyers from the collective sellers. Its even more specific with individual companies.

I short the SPX to you — each tick is zero sum — there’s a winner and a loser.

Stocks that always go up and never go down are exempt from this; Please let me know as soon as you find any.

Business: Marketshare is another example of zero sum: Consider all the ZSG losers who have seen their businesses hurt by the winners in competition:  GM is losing to Toyota; DJ, NYT, WP, and Knight Ridder have been losing to Yahoo & Google; Sony PS is losing to MSFT XBox; Intel has been losing to AMD.

There are situations where the pie is expanding, but even there the ZSG works in percentage basis (not raw numbers).  Google has been taking search share from Miscrosoft and Yahoo. But the entire pie has gotten so big so quickly that even the % share losers are still winning — short term.

Increase in gasoline prices? When Exxon Mobil, BP Amoco and Conoco Philips win because Oil goes up, Wal-Mart and Target lose. Why? There’s a finite amount of cash to be spent, and the more that goes to energy, the less there is for discretionary items. (If you have enough income, the increase is irrelevant to life style, but still comes out somewhere).

Indeed, the decrease in recorded music sales, newspaper and magazine ad sales, TV ratings, movie theater attendance — indeed, all old school non digital entertainment — is a function of a finite attention span. Video games, blogs, internet have all taken some of the pie. Consider iTunes and Morpheus and the demise of Tower records;  My colleague Dennis Kneale at Forbes was incorrect last night when he states that newspapers anbd magazines are fine;  They have been the losers in the ZSG for media.

Economy:  The economy is more of a zero sum
game than most people realize. The Politics of the past decade has been
more about capturing a bigger piece of the pie, rather than EXPANDING that pie.

That is a zero sum game.

Consider taxes: The dividend and capital gains tax cuts fell to a
very narrow portion of the population (of which I am a prime
beneficiary). The known costs of these — increased deficits, weaker
dollar strength and buying power — are borne more by certain segments
in the population than others. That is zero sum.

So too interest rates: Cutting them to half century lows was great
for holders of dollar denominated hard assets: Real Estate, Oil, Gold,
Industrial Commodities (Copper, lumber, etc). But the costs of these rate cuts were borne by those interest rate retirees dependent on a their bond portfolios.

Its easy to overlook the zero sum element in a rapidly growing
environment. The post war United States was a classic example, as the middle class expanded enormously. Or, consider the 1990s, where there was so much cash as the pie rapidly inflated that there was lots for nearly everyone.

But do not
misunderstand this: In any non-infinite system, apportionment of costs
and benefits is zero sum. We have corporate profits at a 53 year record high — and the wage and income percent of GDP is at a record low. If you think that is a mere coincidence, you have not been paying much attention. 

There is no free lunch. That is one of the first rules of economics.

UPDATE 2:  October 14, 2006  10:48am (really. funny coincidence)

Some of the criticism of the ZSG post is that I am being overly broad in my usage of the term. That is a fair and accurate complaint.

While I believe market transactions are often ZSG, any major transaction in an economy will have winners and losers; but it is unlikely that the net result ever precisely adds up to zero. My description of this as  Zero Sum Game is both imprecise and inaccurate.  It is more correctly described as a Win/Lose battle over limited resources.

My apologies for the confusion . . .


UPDATE:  October 11, 2006  10:48am

Excellent set of responses in the comments section. Before I get further accused of being a Malthusian, allow me to quailfy a few things:

In our prior discussions of What is Wealth, I discuss several very obvious ways the world can be a non zero sum game: Developments in Technology, gains in individual leisure time, improvement in health care, broad property ownership, increased democratic rights –  are a few examples of where we are much better off than our forefathers. In these instances, it is not a zero sum game.

Amongst the academic writings, there are several areas where the classic school of thought and  accepted concepts spill that are overbroad (and occasionally wrong):

-Markets are perfectly efficient;
-Prediction Markets are accurate;
-Zero Sum Games never apply to broad economies over time.

I am not saying that everything is always a zero sum game — not even close. But I do believe that many more things are zero sum than people realize.



Disclosure: long BP Amoco and Conoco Philips

Category: Data Analysis, Economy, Taxes and Policy, Wages & Income

Blog Spotlight: Capital Chronicle

Another edition of our new series:  Blog Spotlight.

We put together a short list of excellent but somewhat overlooked
blog that deserves a greater audience. Expect to see a post from a
different featured blogger here every Tuesday and Thursday evening,
around 7pm.

Next up in our Blogger Spotlight: RJH Adams (known as Rawdon) of Capital Chronicle. Rawdon was raised in a tiny emerging economy, and his professional life began as a dogsbody at the UK’s economics and finance ministry, HM Treasury. He subsequently moved to the finance functions of multinationals Xerox (UK) and General Electric (France) learning from the inside what making quarterly numbers really involves. In 2000 he left and co-founded an investment vehicle. He lives in the French Alps splitting most of his time between raising three small occasionally charming children and reading about economic development and investment."


Today’s focus commentary looks at:

How good is the Baltic Dry Index as a proxy for global economic activity?                        

Conclusion: Still worth looking at – but with a proviso since 2006.

China moves in 2006 to being a consistent net exporter of steel its
influence over an important driver of the Baltic Dry Index (BDI) – iron
ore for steel production – grows. But China’s massive growth in steel
output has come in large part though government intervention. This, to
some degree, is distorting the underlying freight rate picture.

what degree is key. The level and volatility of the BDI is influenced
not only by total commodity demand but also by fuel costs, seasonality,
fleet numbers, route bottlenecks and sentiment. These additional
factors should temper conclusions about the relevance of China’s steel
activities on the level of the BDI.

BDI has in the past been helpful to assessing global economic activity.
It is, after all, a reflection of real prices paid to ship production
inputs across the globe. Since March this year the index has been on a
tear, rising 70%, or 1,750 points.

Read More

Category: Blog Spotlight

Media Appearance: Kudlow & Company (10/10/06)

Category: Media

How Cheap is the Dow?

Category: Earnings, Economy, Investing, Markets, Psychology

Household versus Establishment Surveys, part 42

Category: Data Analysis, Economy, Employment

Google Buys YouTube — for Free

Category: Corporate Management, Markets, Technology

Resilience or Complacency?

Category: RR&A

Absurdly Large BLS Revisions, part II

Category: Data Analysis, Employment

Survey Says: Americans Top Worry? Rising prices

Category: Inflation

An Absurdly Large Outlier in the History of BLS Revisions

Category: Data Analysis, Economy, Employment