World Economy v. Poker??? Zero-Sum????

[squiffy]

According to Fortune magazine interview with Bill Gates and Warren Buffett, both state very emphatically that world economy is NOT a zero sum game.

So can we please stop saying comparing the American economy or the world economy to an artificial closed system poker game with 9 players and 52 cards in a deck.

See Oct. 31, 2005 issue of Fortune at page 84. Maybe someone can find a weblink.

maybe you should get the nobel prize in econ for figuring this out.
There are a few markets such as options where it is a zero sum game though.

[crazy canuck]

There are a few markets such as options where it is a zero sum game though.

In theory these should return the risk free interest rate. In practice they are negative sum becasue of transaction costs.

[Uglyowl]

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So can we please stop saying comparing the American economy or the world economy to an artificial closed system poker game with 9 players and 52 cards in a deck.


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Who on earth said that? The people here are very smart and that is basic knowledge.

[solucky]

in this way poker is a negative game too (rake):)

why do you say you should earn the risk free interest rate in options markets?
it seems to me there is an equivalent loss for every gain minus transaction costs.
having participated on a small scale i know of know interest i have gained.

[Sniper]

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in this way poker is a negative game too (rake):)

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I have corrected this before... Poker is a zero sum game, because the house counts as part of the system.

[Sniper]

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In theory these should return the risk free interest rate. In practice they are negative sum becasue of transaction costs.

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Canuck, have you been drinking again??? /images/graemlins/confused.gif

[hedgeyerbets]

http://www.riskglossary.com/link/option_pricing_theory.htm

Risk neutral pricing.

[Sniper]

What does that link have to do with zero sum.

[hedgeyerbets]

It explains why options and other derivatives earn the risk free rate in theory... which you called some guy drunk for stating.

[Sniper]

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It explains why options and other derivatives earn the risk free rate in theory... which you called some guy drunk for stating.

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I very humbly suggest you read the article in the link, again!!!

[hedgeyerbets]

the link does not do a good job of explaining the expected theoretical return of options. probably should have read it before linking it /images/graemlins/wink.gif I'll post a reply tomorrow if I remember to bring my hull book home from work /images/graemlins/wink.gif Too lazy to derive the answer.

[hedgeyerbets]

Ah, you are correct. Must lower caffein consumption and stop misreading thing. A perfectly delta-hedged option contract has an expected return of risk free rate - an option contract does not.

[crazy canuck]

Correct me if 'm wrong, but I think an option has an expected return that equals to the risk free interest rate in the Black-Scholes world, becasue everything has to be discounted. But even if it's true I have no idea if this applies in the real world.

PS: I haven't been drinking when I made the original post, but I've been drinking now. The restaurants have some good wine selection here in Montreal. /images/graemlins/smile.gif

[crazy canuck]

Never mind. I think becasue the option is already discounted, if you are long it has an expected return equal to the interest rate, but the person on the other side of the trade loses an expected amount equal to the interest rate. So yes it is zero sum (without transaction costs).

I was also thinking of the delta neutral portfolio.

[Sniper]

Just for the record... options are risky... don't want anyone thinking they can buy options and get a risk free return!! /images/graemlins/smile.gif

There are also option strategies that mitigate some of the risk.