I realised my understanding of zero sum games is actually quite good and I thought perhaps I should share some of my own thoughts. Firstly zero sum just means that for every winner there is a loser, there is no wealth created. Investing isn't a zero sum game because companies actually create wealth. I am always interested by zero sum games because you have to out think someone and it's definitely a great feeling when you make money from it too.
I wanted to just write briefly on the world of gambling and the game of small edges that exist within zero sum games, such as poker and trading. Having a small edge is the profitable way to make money in an environment that could potentially be a gambling environment, but then who is losing is it someone who is gambling? Well yea it can be, for example the game of poker is sustained by people who gamble and money is injected at different levels by these players depending on their wealth. As well as people who are there to gamble and are not willing to learn to obtain an edge there are players who are losing money while they learn in hope that one day they will have an edge. Not everyone can be profitable because their is no wealth being created, in fact the poker site is taking some itself but it's not enough to stop the serious player from leaving all together. For the most part the money is injected at the lowest levels, where small amounts of money are exchanged, there is a negative correlation between the number of players at each level and the amount of money. While money is deposited it tends to trickle up the system to the bigger players, for each player winning huge amounts consistently there has to be either lots of smaller players depositing or one really rich guy depositing, and most profitable players are supported by the former as it is harder for money to trickle down to the lower stakes. A profitable player who is somewhere in the middle of all of this will take money off people below them and transfer it to the players above. Players can move up the stakes in the following ways: naturally, through frustration or through misjudgement which can happen when the player catches a good string of cards and pushes his expectations past what is actually true. In the last case their judgement becomes clouded by their recent good run and they move up the stakes and play for larger amounts of cash. Often players set a target for how much they should make before moving up, but sometimes you can hit the target faster than you would have on average and it can cause you to find yourself in a game you aren't ready for and it is then likely you will lose money to others, but it doesn't necessarily mean you are a losing player, you are just one at this table.
This is where there is a thin line between both gambling and being a skilled card player. There is one path which leads to frustration whereby the player refuses to move down and in some cases moves up to make the losses back in a way that could be quicker but is most likely an unprofitable situation. The other is move back down and rebuild your losses and wait for a better opportunity to move back up. This mentality is what most serious poker players try and obtain. It is important to understand why money moves, why players can keep taking huge chunks out of the game and why there exists both gambling and a game which can be profitable and in theory no risk of loss over the long term.
I just read a thread on trading which stated there are 80% of losers because 80% of people care too much, they cannot let go of losing money and they think too much about the end result. There is some truth in what he says, which I think can be said by not getting emotionally tied down when you lose which is an important attribute to have. But really something like day trading which is often a zero sum game will always have a smaller pool of winners, because in trading, successful traders will at some point trade a bigger size to capitalize on their skills. It's just like any food chain; there are fewer and fewer numbers the higher you go up. The big winners are supported by loads of smaller losers who collectively lose to make the larger player be able to take such a big chunk out the markets.
An interesting addition in trading is the fact everyone is at the same table if you relate it to poker, it's like your sitting at a poker table with a small stack and on your left is one of the best poker players with a huge stack, and the smaller stack is always at a disadvantage. For example in a tournament when the last few non paid places are approaching the big stack often takes advantage of the medium stacks who are still vulnerable to busting out but are not so small that they are just looking to double up. The big stack exploits the fact they will often fold too much because they are scared of getting into a big pot that could eat their whole stack, the medium stack want to at least make their buy-in back before taking risks. The same happens in trading, the bigger players who trade larger contracts dictate the flow of the market, it's a similar concept just they are willing to directly take money from smaller players who will sell them stock at a low point or buy their stock at markets peak. Therefore already before we've considered how to play this 'game' there are disadvantages to those with small amounts of money to trade with. I have to say trading relates a lot to poker, it even has mind games which take place in level II. Level II shows the order book and who is bidding what, apparently the bigger players try to fake movements and get others to trade against the way the think it is going move or the way they will make it move. I guess it's just another playing field and hopefully I will understand and use it one day.
To conclude, some people think zero sum games are a form of gambling and chance, but I disagree and I think anything with an array of decisions and information has the ability to create someone an edge and as long as the costs are not too high. Therefore as long as the players who have an edge are keeping within the area which give them their edge (which are sometimes at times a little blurry even to the player) it allows it to be classified outside gambling.
Here's a link to an interview of a successful trader (3rd post down)
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