Wealth Creation and the Zero-Sum Fallacy

In-game theory, a zero-sum scenario occurs when one person’s gain is equal to another’s loss, resulting in a net adjustment in wealth or profit of zero. A zero-sum game may include as few as two parties or as many as millions.

Options and futures are instances of zero-sum games in financial markets, ignoring transaction expenses. For every individual who benefits from a contract, there is indeed a counterparty that suffers a loss.

Zero-sum games may include as few as two players or as many as millions. Futures and alternatives are considered zero-sum games in financial markets since the contracts reflect negotiations between 2 parties and, if one investor loses, the money is transferred to another investment. Because the final outcome may benefit both parties, most operations are non-zero-sum games.

Wealth Creation and the Zero-Sum Fallacy

The “zero-sum game” is a Game Theory example of situations in which one person’s victory requires the loss of the other player; in other words, there really is no such thing as a win-win situation in which both players gain. Some see the free market system as a zero-sum game in which people and countries can only gain themselves by impoverishing others. This is a fundamental mistake, however, since it ignores the fundamental principles of free trade and wealth generation.

History of Zero-Sum Game

Of course, ignoring the difficulties of a rising global population is stupid, but much more common is an overly pessimistic view of human creativity and production. The notion that our planet’s riches are a set pie has been disproven again and again. Aspiring prophets continually underestimate humanity’s ability to develop and generate new kinds of riches.

Examples of Zero-Sum Game

While it comes to economics, there are many variables to consider when comprehending a zero-sum game. The zero-sum game presupposes a variant of perfect competition and perfect information; in the model, both opponents have all of the necessary information to make an educated choice.

Taking a step back, most transactions or trades are fundamentally non-zero-sum games because when 2 parties agree to trade, they do so with the knowledge that the goods or services they get are more valuable than the products or services they exchange for, after transaction expenses. This is known as positive-sum, and the majority of transactions fit under this category.

Because the agreements are contracts between two parties, and if one party loses, the other party wins, futures contracts trading is the closest realistic example to a zero-sum game situation. While this is a highly basic description of options and futures, in general, if the price of that commodity or underlying asset increases (typically against market consensus) within a certain time period, an investor may profitably terminate the futures contract. As a consequence, if one investor profits from that wager, there will be a commensurate loss, resulting in a wealth transfer from one investor to the other.

Wealth Creation

When creative humans develop new or more effective methods to satisfy the desires and needs of others, wealth is created. For example, the discovery of the internal combustion engine, coupled with technology for collecting and refining crude oil, transformed a formerly useless, sticky material into an enormously valuable resource known as “black gold.”

Its usage, in turn, allowed people all over the world to travel and transport products further, faster, and more cheaply than ever before. Such advancements have enabled the world’s population to expand rapidly while also reducing the percentage of people living in poverty. This could not have happened if global wealth was a zero-sum game.

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Practical Implication

Many progressive policies reflect zero-sum-game thinking, despite the apparent promise of wealth growth and the folly of zero-sum reasoning. Some argue that wealthy nations must have accumulated their riches only via the exploitation of others and that this imbalance should be corrected by sending assistance from rich to poor countries.

Unfortunately, such top-down approaches to overseas assistance have a poor track record of effectiveness and often do more damage than good. What has proven to be successful, however, is cultivating the conditions (for example, property rights, the rule of law, the liberty to enter into larger networks of production efficiency and circles of exchange, and a culture of entrepreneurial behavior) that result in increased wealth creation for both rich and poor countries.

Positive Sum vs Zero-Sum Game

A zero-sum game is the inverse of a positive-sum game; it requires someone else to lose in order for you to win. A zero-sum game is one in which the winner takes everything. Someone’s gain is precisely proportional to someone else’s loss. If the pot is $1,000, the money is made up of each player’s contributions.

Everyone else’s contribution must be forfeited in order for someone to win the $1,000. As Naval Ravikant explains out in a blog article, status is another zero-sum game:

Status is an ancient game. We’ve been doing it since the days of monkey tribes. It is structured in a hierarchical manner. Who is the top dog? Who is the runner-up? Who comes in third? And in order for number three to go up to number two, number two must shift out of that position. As a result, status is a zero-sum game.

This is why fighting strangers on the internet is such a pointless exercise. It’s a zero-sum game that requires you to bring others down in order to ascend.

Conclusion

Wealth creation is competitive to some degree. It’s a positive-sum game with some competitive aspects. Because there are only so many resources available in society right now. To obtain the resources you need to accomplish what you desire, you must stand out.

Finally, in practice, the fact that the country is expanding and wealth is rising provides the government with more tax revenue, which it may use to offer assistance to the poor. The fact that the country is expanding indicates that taxes did not destroy it, therefore investors and wage workers benefit. And the impoverished individuals who get government assistance benefit.