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The act of trading is zero-sum(slightly worse when you consider taxes and fees). On one side, a person is getting a right to an uncertain cash flow based on the

The act of trading is zero-sum(slightly worse when you consider taxes and fees). On one side, a person is getting a right to an uncertain cash flow based on the companies performance and giving up a lump sum of cash in the present. On the other side the person is giving up the uncertain future cashflows for a lump sum in the present. Both people can win based on their risk/liquidity preferences but one person's upside is the other person's downside.

oceanplexian 7y ago
I'm not sure you're using the terminology zero-sum correctly. Yes bad investments can be zero-sum, but as a whole, the economy is positive-sum. Positive sum doesn't mean "Everybody gets paid the same", it means that the value output from a closed system exceeds the input (e.g. greater than the sum of its parts) If you're referring to derivitives, you could technically refer to it as zero sum, since speculating on a contract between two parties doesn't necessarily create value. But there's an argument to be made that options actually help liquidity, and the act of being able to purchase insurance contracts on investments reduces risk, meaning more people are likely to invest, which does, in the end, actually create value.
- TeMPOraL 7y ago
  > but as a whole, the economy is positive-sum But is that due to trading? I thought it's due to population growth and progress of technology creating more wealth faster. A locally zero-sum game in a growing environment may not feel like zero-sum.
  - ajaalto 7y ago
    Trading helps the society to determine various prices and therefore makes it possible to allocate resources more efficiently.
    - TeMPOraL 7y ago
      It does, but I get the distinct feeling that we're putting cart before the horse. I mean, we ought to be able to correctly price wheat and steel better than through ever-growing financial industries and having people use satellites to spy on CEOs.
- jklein11 7y ago
  I think we are saying the same thing here. I am talking specifically about the trade and not the macro economy. In the case of buying a security, the expected value of the buyer is the future cash flow from the security minus the purchase price. The expected value of the seller is the proceeds of the sale of the security minus the opportunity cost of the future cash flows. These two sides are exactly the same (again ignoring taxes and fees) This is true of any security be it equities or bonds or derivatives. Value isn’t created through trading, but both parties can be made better off because their preferences are different. For example I’m in my late 20’s and don’t need all of my income to live. I don’t mind taking risk for a higher return I could enjoy in the future. My parents are in their mid 60s and have a more immediate need for their money and would be willing to take less return for more stability. Me trading cash for their equities would make us both better off.

oceanplexian 7y ago

I'm not sure you're using the terminology zero-sum correctly. Yes bad investments can be zero-sum, but as a whole, the economy is positive-sum. Positive sum doesn't mean "Everybody gets paid the same", it means that the value output from a closed system exceeds the input (e.g. greater than the sum of its parts) If you're referring to derivitives, you could technically refer to it as zero sum, since speculating on a contract between two parties doesn't necessarily create value. But there's an argument to be made that options actually help liquidity, and the act of being able to purchase insurance contracts on investments reduces risk, meaning more people are likely to invest, which does, in the end, actually create value.

TeMPOraL 7y ago
> but as a whole, the economy is positive-sum But is that due to trading? I thought it's due to population growth and progress of technology creating more wealth faster. A locally zero-sum game in a growing environment may not feel like zero-sum.
- ajaalto 7y ago
  Trading helps the society to determine various prices and therefore makes it possible to allocate resources more efficiently.
  - TeMPOraL 7y ago
    It does, but I get the distinct feeling that we're putting cart before the horse. I mean, we ought to be able to correctly price wheat and steel better than through ever-growing financial industries and having people use satellites to spy on CEOs.
jklein11 7y ago
I think we are saying the same thing here. I am talking specifically about the trade and not the macro economy. In the case of buying a security, the expected value of the buyer is the future cash flow from the security minus the purchase price. The expected value of the seller is the proceeds of the sale of the security minus the opportunity cost of the future cash flows. These two sides are exactly the same (again ignoring taxes and fees) This is true of any security be it equities or bonds or derivatives. Value isn’t created through trading, but both parties can be made better off because their preferences are different. For example I’m in my late 20’s and don’t need all of my income to live. I don’t mind taking risk for a higher return I could enjoy in the future. My parents are in their mid 60s and have a more immediate need for their money and would be willing to take less return for more stability. Me trading cash for their equities would make us both better off.