Zero-sum Game

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Description of Zero-sum Game. Explanation.


Zero-sum game: gains - losses = 0Definition Zero-sum Game. Description.

A Zero-sum Game is an economic term used in Game Theory referring to a situation in which the accumulated gains (profits, benefits) of one or more participants in an activity is offset by the accumulated losses (disadvantages) of one or more other participants.

For instance, consider poker as a zero-sum game. If each of 5 players brings $100 to the table, there is still $500 among the players at the end of the game; it just is distributed differently among the players.

Typical examples of zero-sum games in investing are options and future contracts (excluding costs). Because for every investor who gains on an option there is a counter-party who loses. A stock market is not a zero sum game, because wealth or value can be created (or lost) in a favorable (or unfavorable) market.

Typically, many business and management activities including strategy formulation are aimed at identifying and pursuing positive-sum opportunities - also called non-zero-sum opportunities or win-win situations.

The primary financial objective of most for profit companies is to maximize the wealth of its shareholders. And according to Michael Porter, a competitive strategy takes offensive or defensive action to create a defendable position in an industry, in order to cope successfully with competitive forces and generate a superior Return on Investment.

In political terms, socialists typically consider national economies as a zero-sum game (if A grows $5,000 richer, it is because this wealth was extracted from some number of victim Bs). Whereas capitalists typically consider national economies a non-zero-sum game (everybody benefits from economic activities; voluntary transactions address the preferential desires of both parties).

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Compare with: Game Theory  |  Economic Value Added  |  Competitive Advantage

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