Tuesday, October 26, 2010
Degrees of winning and losing do not make a difference
There is this really great piece by Dr. Lawrence Harris at USC, The Winners and Losers of the Zero -Sum Game, which would be a very appropriate reading some other time this semester, assuming we want to take a balanced approach at viewing these discussed topics. I am happy that the author this week discusses the different transactions that can take place in the stock market as an example. However, I strongly disagree with his assertion that there can only be different winners and losers to different degrees in the system. Dr. Harris, for instance, argues in his article that "on any given transaction, the chances of winning or losing may be near even. In the long run, however, winners profit from trading because they have some persistent advantages that allow them to win slightly more often (or occasionally much bigger) than losers win." For instance, he states that winners in such a system will be able to choose better portfolios, sell trades better, and negotiate trades better. This is a clear advantage over the losers. Any time a transaction occurs, there is always a loser. If I were to sell a candy bar, for instance, which could also be a stock in the market, I would obviously sell it for a price. If this price is greater than the value, I win. If it is less than the value, the other person wins. In this type of a scenario, there is no way both can benefit at the same time. The difference in the degree of benefitting and losing does not change the fact that the stock market is, in fact, a zero sum game.