Investing Is Not A Zero-Sum Game

Ask the majority of people about investing and they will probably tell you that when the stock market rises, everyone wins and when it drops, everyone loses. But this isn’t the case. Investing in the stock market is not a zero-sum game. You have investors making money and losing money every single day, regardless of what the market does.

How is this possible? In this post, we will look at what a zero-sum game is, why investing doesn’t fit the definition, and how you can make money, regardless if the market is rising or falling.

Photo Source

What Is A Zero-Sum Game

You now know that investing is not a zero-sum game. But what exactly is a zero-sum game? Game theory was first introduced by John von Neumann in 1944 in his book, Theory of Games And Economic Behavior.

It takes into account various factors, including gains, losses, individual behaviors and more.

The classic definition of zero-sum game is when one person wins, the other person loses. For example, if you and I are playing poker and my hand is better than yours and I win, then you lose. I take the money in the pot.

In other words, the winner takes the money and the loser is left with nothing. Understand that a zero-sum game can happen between two people or hundreds or even millions of people. All that matters is there is a winner and loser.

Why Investing Is Not A Zero-Sum Game

Now that we know exactly what a zero-sum game is, how is investing not this? After all, when I sell a stock that I’ve lost money in, I am losing aren’t I? Not necessarily.

First off, it is important to know that part of zero-sum games is that it assumes all parties in the transaction have all of the information to make the best decision. When it comes to buying or selling stock, both parties don’t have all the same information. One might have more information or better information that leads them to believe a stock is worth buying or selling.

As a result, they make their informed decision based on what they know.