4 ms·

It's positive sum in utility but zero sum in dollars. People get caught up on the latter when all that matters is the former. Think of a pawn shop on a street

It's positive sum in utility but zero sum in dollars. People get caught up on the latter when all that matters is the former. Think of a pawn shop on a street corner. They trade by making markets, engaging in a zero dollar sum game. But it's absolutely positive sum in utility.

WA 6y ago
The pawn shop is the exchange and yes, they provide utility. But one person sells a contract, another buys the contract. One loses money, the other gains money. The exchange isn’t part of the equation. It’s zero-sum between contract parties.
- hnracer 6y ago
  The pawn shop is the market maker (ie trader) since they hold inventory and provide a bid ask spread. Exchanges don't provide this service. I could make the same claim that you've made about pawn shops as a reductio ad absurdum. That individual with second hand jewellery gained X dollars when they sold it to the pawn shop and the pawn shop lost X dollars. So it's zero sum. Although it isn't except in the most myopic sense (that of dollars). Transactions (on financial markets or otherwise) are always subjectively positively sum in utility and that's what matters. Here's some examples. Suppose someone gets a terminal illness and needs to sell all their stocks to a willing buyer in order to get cash. It's zero sum dollars (just like every material transaction in the economy) but utility was gained, the person that needed the liquidity got it immediately and with near zero slippage. Other examples: The farmer that needs to hedge their crop yields, the airliner that needs to hedge oil prices, the gold miner that needs to hedge gold prices. The supply side and demand side of this equation gains utility from engaging.
  - WA 6y ago
    Good examples and yes, that makes the utility clear. But it's still zero-sum in dollar terms. So, if there is a big story about "The boys who made 600 million dollars with oil futures contracts", that is strictly in terms of dollar value and their gain (a good trade), is someone else's loss. That is what I'm talking about in response to my parent poster, who claimed: > "There are limited resources and society have decided that these people deserve a big chunk of that resources." As if society decided collectively to pay an unfair amount to a good/lucky trader. They took it from other market participants and not from average joe. My intention with my initial comment was to point out that it simply doesn't matter if one market participant has 600 million more than before, because others in the market lost it.
    - hnracer 6y ago
      I think we agree with that statement of fact that it's zero sum in dollar terms. I would only object if we were to take that further as a commentary on the goodness or badness of such an occurrence, since the nature of every transaction is that it's zero sum in dollars.

WA 6y ago

The pawn shop is the exchange and yes, they provide utility. But one person sells a contract, another buys the contract. One loses money, the other gains money. The exchange isn’t part of the equation. It’s zero-sum between contract parties.

hnracer 6y ago
The pawn shop is the market maker (ie trader) since they hold inventory and provide a bid ask spread. Exchanges don't provide this service. I could make the same claim that you've made about pawn shops as a reductio ad absurdum. That individual with second hand jewellery gained X dollars when they sold it to the pawn shop and the pawn shop lost X dollars. So it's zero sum. Although it isn't except in the most myopic sense (that of dollars). Transactions (on financial markets or otherwise) are always subjectively positively sum in utility and that's what matters. Here's some examples. Suppose someone gets a terminal illness and needs to sell all their stocks to a willing buyer in order to get cash. It's zero sum dollars (just like every material transaction in the economy) but utility was gained, the person that needed the liquidity got it immediately and with near zero slippage. Other examples: The farmer that needs to hedge their crop yields, the airliner that needs to hedge oil prices, the gold miner that needs to hedge gold prices. The supply side and demand side of this equation gains utility from engaging.
- WA 6y ago
  Good examples and yes, that makes the utility clear. But it's still zero-sum in dollar terms. So, if there is a big story about "The boys who made 600 million dollars with oil futures contracts", that is strictly in terms of dollar value and their gain (a good trade), is someone else's loss. That is what I'm talking about in response to my parent poster, who claimed: > "There are limited resources and society have decided that these people deserve a big chunk of that resources." As if society decided collectively to pay an unfair amount to a good/lucky trader. They took it from other market participants and not from average joe. My intention with my initial comment was to point out that it simply doesn't matter if one market participant has 600 million more than before, because others in the market lost it.
  - hnracer 6y ago
    I think we agree with that statement of fact that it's zero sum in dollar terms. I would only object if we were to take that further as a commentary on the goodness or badness of such an occurrence, since the nature of every transaction is that it's zero sum in dollars.