Wealth creation in zero sum games

In a zero sum game like poker, everyone who plays is on average a net loser, due to the rake. Those who overcome the rake and their opponents to become winners must always be the minority, in the end, even though there could concievably be nine winners and one loser at any given table. However, it seems to me that there are a couple of things that players can do to raise EV for EVERYONE, and these actions have corollaries in the stock
market. because they can make poker seem a non-zero sum game for a time.

the first thing to recognize is that the rake is an inefficiency in the game that causes loss of wealth to all players. Inefficiencies can be corrected with technology in the market, and similarly in poker. Given a time charge, installing a properly working shuffler will raise everyone's EV, just as the invention of the cotton gin raised EV in the stock market.

For a short time at least, poker is now a non zero sum game, because a shuffler means quicker hands, which means more hands per half-hour per charge, and a higher expected earn. However, when the inefficiency is corrected, poker goes back to zero-sum.

The same may be also true with the stock market. Wealth is "created" at the moment due to increasing efficiency in production and implementation. However, in a closed system(poker table, earth) there is a limit to the creation of wealth.

In fact, both the poker table and stock maket may start out as worse than zero sum, and "create wealth" only until it reaches zero sum. think of the corallary between rake in a poker game and fees in a mutual fund. On average, when fees or rake go to zero, the poker player earns according to skill, and the mutual fund earns the market return.

there are some internal inconsistencies here which I'm sure you can see, but nevertheless it is interesting.

[JohnnyHumongous]

Wealth may not be created in the zero-sum game of poker but utility is. The expected utility of a losing player gamboooling his $1000 at 10/20 is generally greater than if he had that $1000 in his pocket. If his EV after 4 hours of playing 10/20 with that $1000 is say $800 that means he expects to lose 2.5BB per hour. However, the fun, entertainment and enjoyment he gets is worth more than the $200 he expects to be down.

There is almost always a direct correlation between how much "fun" a table appears to be having and how soft or profitable it is. Think about that.

The point is that wealth can be created in zero sum games, if viewed from the short term. The question is whether the stock market behaves in a similar manner, or if there are some fundemental differences.

[hedgeyerbets]

the stock market isn't zero sum. a better analogy would be to trading options (though even the options market theoretically should create wealth at the risk free rate)

Please explain why you believe the stock market is not zero sum over the long term. Is it because you think it has infinite room to expand?

[hedgeyerbets]

Not necessarily infinite, but yes they have a lot of room to expand. Think about it. Any increase in technology/productivity increase the amount of wealth that can be created for a given amount of money. So in the long run the stock market generates value, because shares of stock represent ownership of a company. And the value of companies in general will increase over time for the previously stated reason (there are others, as well).

[SheetWise]

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Please explain why you believe the stock market is not zero sum over the long term. Is it because you think it has infinite room to expand?

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It is not zero sum because the sum total can change. Everyone can win -or- everyone can lose. That can't happen in poker.

[Brainwalter]

Installing a shuffler doesn't improve the players' collective EV, it makes their -EV worse because the house is raking more often.

[SheetWise]

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In a zero sum game like poker ...

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Poker is a negative sum game, if there is a rake.

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Given a time charge, installing a properly working shuffler will raise everyone's EV ...

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It will lower the commission, that's all.

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On average, when fees or rake go to zero, the poker player earns according to skill...

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They never go to zero, they can only approach zero.

[SheetWise]

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Installing a shuffler doesn't improve the players' collective EV, it makes their -EV worse because the house is raking more often.

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The OP said "Given a time charge, installing a properly working shuffler will raise everyone's EV..."

[Sniper]

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In a zero sum game like poker, everyone who plays is on average a net loser, due to the rake.

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Poker is a zero sum game because the Poker room rake counts as a player...

5 players sit down to play...at the end of the night...
As + Bs + Cs + Ds + Es = Ae + Be + Ce + De + Ee + Rake
s=starting $
e=ending $

The system (playing poker) neither created nor destroyed any $, it just shuffled the wealth around!

This is not the case in the stock market.

[squiffy]

Completely different. Poker is a game with limited number of players. Chips. Etc. Narrowly defined universe.

New companies can be added to stock market. And amount of money that can be invested in U.S. stock market by Americans and foreigners incredibly large. And amount of natural resources that corporations can acquire and sell is so large and can expand.

Stock market is only limited in the philosophical sense that total amount of matter in the universe is finite. But that is so theoretical as to be almost meaningless.

[SheetWise]

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Poker is a zero sum game because the Poker room rake counts as a player...

5 players sit down to play...at the end of the night...
As + Bs + Cs + Ds + Es = Ae + Be + Ce + De + Ee + Rake
s=starting $
e=ending $


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Note that one can more easily analyse a zero-sum game; and it turns out that one can transform any game into a zero-sum game by adding an additional dummy player (often called "the board"), whose losses compensate the players' net winnings. Link. (http://www.answers.com/topic/game-theory)

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[Sniper]

I have not added a player to make poker a zero sum game.. the rake is part of the system!

Squiffy, they are not completely different. Just because poker is more narrowly bounded than the stock market does not mean they necessarily follow fundementally different rules. Suppose for a minute that the market was as narrowly bounded as poker. Are there different rules between them? Or do you believe the short term market wealth creation caused by expansion and innovation cannot end. A perpetual motion machine?
It's interesting that for a short time a zero sum game can appear to create wealth for all the players. Such a situation can appear in poker under conditions I outlined earlier.
Is that what's happening in the market? Whatever you decide, you must know that resources are far from inexhaustable. If you are planning to pump "all the matter in the universe" into the market, then I have some land on pluto to sell you.

[SheetWise]

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I have not added a player to make poker a zero sum game.. the rake is part of the system!

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As a player, I only look at it from the players perspective, and while the rake is a part of the process -- it's not one of the players. Just out of curiosity (I would have to assume you also consider dog and horse racing a zero-sum-game) -- do you consider any gambling game (aside from warfare) to be negative sum?

[Sniper]

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As a player, I only look at it from the players perspective, and while the rake is a part of the process -- it's not one of the players. Just out of curiosity (I would have to assume you also consider dog and horse racing a zero-sum-game) -- do you consider any gambling game (aside from warfare) to be negative sum?

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EV and zero-sum are different concepts!

When you place a bet in a gambling game against the house, the house is clearly a player.

[SheetWise]

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EV and zero-sum are different concepts!

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I know. That wasn't the question.

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When you place a bet in a gambling game against the house, the house is clearly a player.

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Understood. But in casino poker, you're not betting against the house -- the house is a parasite.

[Sniper]

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the house is a parasite.

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and the parasite is a part of the poker ecosystem /images/graemlins/smile.gif

In any case, it doesn't really matter how you classify the rake, because from a game theory perspective you still have to account for the rake effect either way! /images/graemlins/smile.gif

[SheetWise]

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In any case, it doesn't really matter how you classify the rake, because from a game theory perspective you still have to account for the rake effect either way!

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My thinking is that in a raked game, the pie is shrinking. In the end, the sum of players gains and losses must add up to less than zero. A negative sum game.

While poker has always been the primary example of a zero sum game -- I understand the example to be a home game.

[Germane]

I hate to be harsh here Matt, but your logic is downright terrible. Poker will never be zero-sum because there is friction within the system. That friction has to do with dealing and fair-play, which you either pay for at the casino, or pay for with your time in a home game. Poker will never be better than zero-sum because nothing is created. It’s merely a transfer of wealth.

The friction in the market relates to trading costs such as commisions. These will never disappear either, but they do continually decrease. The market, however, isn't a zero sum game. Earth doesn't function in a zero sum system of transfers like poker does. The market doesn't create wealth simply from natural resources. It creates wealth through innovation and creative power. The earth has had the same amount of raw resources in some form or another for millions of years. Nothing enters or leaves our atmosphere (on net, in general). Wealth isn't created from the existence of raw silicon and iron in the ground, it is created from our ability to transform it into skyscrapers and computers. It is created from transforming 10 acres of desert into farmland, allowing it to feed 50 times as many people as before. The best analogy I can give is this: Where would you rather live?

1. An acre of land with a pile of building materials
2. An acre of land with a house

Human progress means that we’re always transforming materials into things that we have more use for. It means an organization of resources, not just a depletion.

Wealth is measured by goods which people ascribe meaning to or have use for. There is no limit to the amount and variety of demand that humans will have, and there is no limit to the lengths we can go to in order to satisfy this demand. This is the basis of economics and the basis of the market: Satisfying unlimited need with unlimited resources. Humans have done an amazing job satisfying needs, and they've done it all with the same resource base of our earth. Sure, eventually the universe will end. Much sooner, I'll be dead. But I'm willing to forgo consumption in order to have future consumption, and someone else out there is willing to share his creativity if I invest with him and help make his idea reality, and together we make the world more productive. This is the process of the stock market, and it’s not a zero sum process. The cooperation of ideas, work, and capital makes the world more productive.