What Is a Zero-Sum Game? | The Motley Fool (2024)

A zero-sum game is a conceptual framework to describe a competition where one party’s gains come at the expense of another party. It’s a metaphor that is often used in business to describe a battle over market share between two companies or when one decision counteracts another due to trade-offs. It can also describe a personal or relationship dilemma where the benefit of one decision is erased by its costs.

What Is a Zero-Sum Game? | The Motley Fool (1)

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Where it comes from

Where does the term come from?

A zero-sum game is a mathematical concept meaning that the sum of gains and losses for both parties zero out or negate each other.

The phrase is based on classical game theory, where one person’s win means that another has lost, producing a net gain of zero.

The concept of a zero-sum game can be applied to a wide range of activities, including business, competitions like sports, relationships, and more general financial activities.

Things to know

What you should know about zero-sum games

Some common examples of zero-sum games are chess and poker. In those games, one can’t win without another losing, and the gains of one party come from the losses of another.

In chess, a move can improve your position or take your opponent’s piece, and those gains come at the expense of your opponent.

In the financial world, options represent one form of a zero-sum game since an option will gain or lose value for one party and do the opposite for the other. The buyer and seller are at odds, meaning that a gain for one is a loss for the other. The same holds true for other derivatives.

Stocks, on the other hand, are arguably a non-zero-sum game. Selling a stock may be right for one investor since it gives them cash they need for something like retirement or buying a home, while another investor may benefit from purchasing a stock that goes up over the long term.

Why they matter

Why zero-sum games matter

Whether you’re an investor or seeking to understand the zero-sum game concept for personal reasons, it helps to know when you’re dealing with a zero-sum game. In business, for example, two companies may be fighting over a fixed amount of market share. That would be a zero-sum game since one company’s market share gains would come at the expense of the other.

Alternatively, in a growth market, both parties might be going after a growing pie rather than pieces of a fixed pie, which is going to make their strategies different. Instead of focusing on profitability and market share, companies in a growing market are likely to spend more on growth drivers like marketing or research and development, potentially accepting a short-term loss because they believe it will lead to a long-term gain.

Elsewhere, a non-zero-sum game leaves room for collaboration since both parties have room to win. For that reason, playing a non-zero-sum game is preferable to a zero-sum game. Trade is one example of a non-zero-sum game since, according to the theory of comparative advantage, trade creates economic benefits for all parties that participate.

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Example

An example of a zero-sum game

Any one-on-one type of game offers a good example of a zero-sum game. This includes chess, gambling when two parties take the opposite sides of a bet, and sports such as tennis when each side is playing against the other.

In finance, there isn’t a perfect example of a zero-sum game, but derivatives trades such as options or futures are close since they tend to be short-term in nature and because there is a direct relationship between one party making a gain and the other party experiencing a loss.

Understanding zero-sum games can help you be a better kind of investor in any kind of market environment, including bull markets, and can help you make better decisions in your personal life as well.

If you can find a way to turn zero-sum games into non-zero-sum games, you can use that to your advantage, and it can help you look at decisions differently.

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What Is a Zero-Sum Game? | The Motley Fool (2024)

FAQs

What Is a Zero-Sum Game? | The Motley Fool? ›

A zero-sum game is a conceptual framework to describe a competition where one party's gains come at the expense of another party.

What is meant by zero-sum game? ›

What Is a Zero-Sum Game? Zero-sum is a situation, often cited in game theory, in which one person's gain is equivalent to another's loss, so the net change in wealth or benefit is zero. A zero-sum game may have as few as two players or as many as millions of participants.

What is a zero-sum game in investing? ›

A zero-sum game means that for one person to win, another person must lose. The gains of the winner offset the losses of the loser. Zero-sum games don't just apply to sports and board games. In finance, a zero-sum game means one investor earns the money that another investor loses.

What is an example of a nonzero sum game? ›

What is a Non Zero Sum Game? A non zero sum game is a situation where there is a net benefit or net loss to the system based on the game's outcome. An example of what should be considered a non zero sum game is a contest between a trade ship and a pirate ship, although it may look like one at first glance.

What is an example of a two person zero-sum game? ›

Tic-tac-toe is a simpler example of a two-player zero-sum game. To a game theorist, a strategy for the first player describes the first move and where to move on future opportunities under all possible circ*mstance. This leads to an enormous number of strategies.

What is an example of zero sum thinking? ›

In a negotiation when one negotiator thinks that they can only gain at the expense of the other party (i.e., that mutual gain is not possible). In the context of social group competition, the belief that more resources for one group (e.g., immigrants) means less for others (e.g., non-immigrants).

Is Rock Paper Scissors a zero-sum game? ›

A rock beats scissors, scissors beat paper by cutting it, and paper beats rock by covering it. In this simulation, the computer has two different strategies that it can follow. Rock, paper, scissors is an example of a zero-sum game without perfect information. Whenever one player wins, the other loses.

What are sum zero games examples? ›

Examples of zero-sum games include poker, chess and tennis in the entertainment world and future and options in the financial industry.

What is an alternative to a zero-sum game? ›

In a non-zero-sum game the players' payoffs no longer need to sum to a constant value. Now it is possible for both players to gain or both players to lose. Both Prisoner's Dilemma and Chicken are models of games where we describe the choice of strategy as “Cooperate” and “Defect”.

What's the opposite of a zero-sum game? ›

In game theory, situation where one decision maker's gain (or loss) does not necessarily result in the other decision makers' loss (or gain). In other words, where the winnings and losses of all players do not add up to zero and everyone can gain: a win-win game.

Is wealth a zero-sum game? ›

Thus, the idea that one person can get wealthy only at the expense of another, or only by making another poor – that is, that wealth is necessarily zero-sum – is a fallacy.

Which of the following best describes a zero-sum game? ›

Mathematicians, economists and analysts use the term zero-sum game throughout game theory and economic theory. It describes the financial gains of one party that cause an equal amount of loss for the other party.

What are zero-sum games in life? ›

Other examples of zero-sum games in daily life include games like poker, chess, and bridge where one person gains and another person loses, which results in a zero-net benefit for every player. In the markets and financial instruments, futures contracts and options are zero-sum games as well.

What is the zero-sum game algorithm? ›

Well, we can use an algorithm called the zero-sum game also known as the minimax algorithm. A zero-sum game is a representation of math when two-players, or each participants in a game, gain or loses a point. It balances the losses or gains of the points from each player.

What are the assumptions of zero-sum game? ›

There are two key assumptions about the behavior of the players. The first is that both players are rational. The second is that both players are greedy meaning that they choose their strategies in their own interest (to promote their own wealth).

What is the zero-sum game in life? ›

Life is indeed a zero-sum game. Whatever matter comes to a living being from the environment inexorably goes back to the environment. The food that we eat, the water that we drink and even the air that we breathe are returned to the environment.

What does zero-sum game mean in slang? ›

noun. : a situation in which one person or group can win something only by causing another person or group to lose it.

What is the zero-sum game in relationships? ›

When this concept is applied to relationships, a zero-sum game mentality reflects the belief that one partner's gain directly results in the other partner's loss. In other words, the relationship is seen as a kind of battleground, where every interaction or decision has a winner and a loser.

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