Zero-sum game

Zero-sum game is a mathematical representation in game theory and economic theory of a

situation that involves two competing entities, where the result is an advantage for one side and an
equivalent loss for the other.[1] In other words, player one's gain is equivalent to player two's loss,
with the result that the net improvement in benefit of the game is zero.[2]

If the total gains of the participants are added up, and the total losses are subtracted, they will sum
to zero. Thus, cutting a cake, where taking a more significant piece reduces the amount of cake
available for others as much as it increases the amount available for that taker, is a zero-sum game
if all participants value each unit of cake equally. Other examples of zero-sum games in daily life
include games like poker, chess, sport and bridge where one person gains and another person loses,
which results in a zero-net benefit for every player.[3] In the markets and financial instruments,
futures contracts and options are zero-sum games as well.[4]

In contrast, non-zero-sum describes a situation in which the interacting parties' aggregate gains
and losses can be less than or more than zero. A zero-sum game is also called a strictly competitive
game, while non-zero-sum games can be either competitive or non-competitive. Zero-sum games
are most often solved with the minimax theorem which is closely related to linear programming
duality,[5] or with Nash equilibrium. Prisoner's Dilemma is a classic non-zero-sum game.[6]

Definition

The zero-sum property (if one gains, another loses) means that any
result of a zero-sum situation is Pareto optimal. Generally, any game Choice Choice
where all strategies are Pareto optimal is called a conflict game.[7][8] 1 2

Zero-sum games are a specific example of constant sum games Choice

−A, A B, −B
where the sum of each outcome is always zero.[9] Such games are 1
distributive, not integrative; the pie cannot be enlarged by good
Choice
negotiation. C, −C −D, D
2
In situation where one decision maker's gain (or loss) does not
Generic zero-sum game
necessarily result in the other decision makers' loss (or gain), they
are referred to as non-zero-sum.[10] Thus, a country with an excess
of bananas trading with another country for their excess of apples, where both benefit from the
transaction, is in a non-zero-sum situation. Other non-zero-sum
games are games in which the sum of gains and losses by the Option Option
players is sometimes more or less than what they began with. 1 2

The idea of Pareto optimal payoff in a zero-sum game gives rise to a Option
2, −2 −2, 2
generalized relative selfish rationality standard, the punishing-the- 1
opponent standard, where both players always seek to minimize the
Option
opponent's payoff at a favourable cost to themselves rather than −2, 2 2, −2
2
prefer more over less. The punishing-the-opponent standard can be
used in both zero-sum games (e.g. warfare game, chess) and non- Another example of the classic
[11]
zero-sum games (e.g. pooling selection games). The player in the zero-sum game
game has a simple enough desire to maximise the profit for them,
and the opponent wishes to minimise it.[12]

Solution

For two-player finite zero-sum games, if the players are allowed to play a mixed strategy, the game
always has a one equilibrium solution. The different game theoretic solution concepts of Nash
equilibrium, minimax, and maximin all give the same solution. Notice that this is not true for pure
strategy.

Example

A game's payoff matrix is a convenient representation. Blue

A B C
Red
Consider these situations as an example, the two-player zero-
−30 10 −20
1
sum game pictured at right or above. 30 −10 20
10 −20 20
2
−10 20 −20
The order of play proceeds as follows: The first player (red)
A zero-sum game (Two person)
chooses in secret one of the two actions 1 or 2; the second
player (blue), unaware of the first player's choice, chooses in
secret one of the three actions A, B or C. Then, the choices are revealed and each player's points
total is affected according to the payoff for those choices.

Example: Red chooses action 2 and Blue chooses action B. When the payoff is allocated, Red gains 20
points and Blue loses 20 points.

In this example game, both players know the payoff matrix and attempt to maximize the number of
their points. Red could reason as follows: "With action 2, I could lose up to 20 points and can win
only 20, and with action 1 I can lose only 10 but can win up to 30, so action 1 looks a lot better." With
similar reasoning, Blue would choose action C. If both players take these actions, Red will win 20
points. If Blue anticipates Red's reasoning and choice of action 1, Blue may choose action B, so as
to win 10 points. If Red, in turn, anticipates this trick and goes for action 2, this wins Red 20 points.

Émile Borel and John von Neumann had the fundamental insight that probability provides a way out
of this conundrum. Instead of deciding on a definite action to take, the two players assign
probabilities to their respective actions, and then use a random device which, according to these
probabilities, chooses an action for them. Each player computes the probabilities so as to minimize
the maximum expected point-loss independent of the opponent's strategy. This leads to a linear
programming problem with the optimal strategies for each player. This minimax method can
compute probably optimal strategies for all two-player zero-sum games.

4
For the example given above, it turns out that Red should choose action 1 with probability ⁠7 ⁠and
3 4 3
action 2 with probability ⁠7 ⁠, and Blue should assign the probabilities 0, ⁠7 ⁠, and ⁠7 to the three actions
20
A, B, and C. Red will then win ⁠ 7 ⁠points on average per game.

Solving

The Nash equilibrium for a two-player, zero-sum game can be found by solving a linear
programming problem. Suppose a zero-sum game has a payoff matrix M where element Mi,j is the
payoff obtained when the minimizing player chooses pure strategy i and the maximizing player
chooses pure strategy j (i.e. the player trying to minimize the payoff chooses the row and the player
trying to maximize the payoff chooses the column). Assume every element of M is positive. The
game will have at least one Nash equilibrium. The Nash equilibrium can be found (Raghavan 1994,
p. 740) by solving the following linear program to find a vector u:

Minimize:

Subject to the constraints:

u≥0
M u ≥ 1.

The first constraint says each element of the u vector must be nonnegative, and the second
constraint says each element of the M u vector must be at least 1. For the resulting u vector, the
inverse of the sum of its elements is the value of the game. Multiplying u by that value gives a
probability vector, giving the probability that the maximizing player will choose each possible pure
strategy.

If the game matrix does not have all positive elements, add a constant to every element that is large
enough to make them all positive. That will increase the value of the game by that constant, and will
not affect the equilibrium mixed strategies for the equilibrium.

The equilibrium mixed strategy for the minimizing player can be found by solving the dual of the
given linear program. Alternatively, it can be found by using the above procedure to solve a modified
payoff matrix which is the transpose and negation of M (adding a constant so it is positive), then
solving the resulting game.

If all the solutions to the linear program are found, they will constitute all the Nash equilibria for the
game. Conversely, any linear program can be converted into a two-player, zero-sum game by using a
change of variables that puts it in the form of the above equations and thus such games are
equivalent to linear programs, in general.[13]

Universal solution

If avoiding a zero-sum game is an action choice with some probability for players, avoiding is
always an equilibrium strategy for at least one player at a zero-sum game. For any two players zero-
sum game where a zero-zero draw is impossible or non-credible after the play is started, such as
poker, there is no Nash equilibrium strategy other than avoiding the play. Even if there is a credible
zero-zero draw after a zero-sum game is started, it is not better than the avoiding strategy. In this
sense, it's interesting to find reward-as-you-go in optimal choice computation shall prevail over all
two players zero-sum games concerning starting the game or not.[14]

The most common or simple example from the subfield of social psychology is the concept of
"social traps". In some cases pursuing individual personal interest can enhance the collective well-
being of the group, but in other situations, all parties pursuing personal interest results in mutually
destructive behaviour.

Copeland's review notes that an n-player non-zero-sum game can be converted into an (n+1)-player
zero-sum game, where the n+1st player, denoted the fictitious player, receives the negative of the
sum of the gains of the other n-players (the global gain / loss).[15]
Zero-sum three-person games

It is clear that there are

manifold relationships
between players in a
zero-sum three-person
game, in a zero-sum
two-person game,
anything one player
wins is necessarily lost
by the other and vice versa; therefore, there is always an absolute antagonism of interests, and that
is similar in the three-person game.[16] A particular move of a player in a zero-sum three-person
game would be assumed to be clearly beneficial to him and may disbenefits to both other players, or
benefits to one and disbenefits to the other opponent.[16] Particularly, parallelism of interests
between two players makes a cooperation desirable; it may happen that a player has a choice
among various policies: Get into a parallelism interest with another player by adjusting his conduct,
or the opposite; that he can choose with which of other two players he prefers to build such
parallelism, and to what extent.[16] The picture on the left shows that a typical example of a zero-
sum three-person game. If Player 1 chooses to defence, but Player 2 & 3 chooses to offence, both of
them will gain one point. At the same time, Player 1 will lose two-point because points are taken
away by other players, and it is evident that Player 2 & 3 has parallelism of interests.

Real life example

Economic benefits of low-cost airlines in saturated markets - net benefits or a zero-sum game [17]

Studies show that the entry of low-cost airlines into the Hong Kong market brought in $671 million
in revenue and resulted in an outflow of $294 million.

Therefore, the replacement effect should be considered when introducing a new model, which will
lead to economic leakage and injection. Thus introducing new models requires caution. For
example, if the number of new airlines departing from and arriving at the airport is the same, the
economic contribution to the host city may be a zero-sum game. Because for Hong Kong, the
consumption of overseas tourists in Hong Kong is income, while the consumption of Hong Kong
residents in opposite cities is outflow. In addition, the introduction of new airlines can also have a
negative impact on existing airlines.
Consequently, when a new aviation model is introduced, feasibility tests need to be carried out in all
aspects, taking into account the economic inflow and outflow and displacement effects caused by
the model.

Zero-sum games in financial markets

Derivatives trading may be considered a zero-sum game, as each dollar gained by one party in a
transaction must be lost by the other, hence yielding a net transfer of wealth of zero.[18]

An options contract - whereby a buyer purchases a derivative contract which provides them with the
right to buy an underlying asset from a seller at a specified strike price before a specified expiration
date – is an example of a zero-sum game. A futures contract – whereby a buyer purchases a
derivative contract to buy an underlying asset from the seller for a specified price on a specified
date – is also an example of a zero-sum game.[19] This is because the fundamental principle of
these contracts is that they are agreements between two parties, and any gain made by one party
must be matched by a loss sustained by the other.

If the price of the underlying asset increases before the expiration date the buyer may exercise/
close the options/ futures contract. The buyers gain and corresponding sellers loss will be the
difference between the strike price and value of the underlying asset at that time. Hence, the net
transfer of wealth is zero.

Swaps, which involve the exchange of cash flows from two different financial instruments, are also
considered a zero-sum game.[20] Consider a standard interest rate swap whereby Firm A pays a
fixed rate and receives a floating rate; correspondingly Firm B pays a floating rate and receives a
fixed rate. If rates increase, then Firm A will gain, and Firm B will lose by the rate differential (floating
rate – fixed rate). If rates decrease, then Firm A will lose, and Firm B will gain by the rate differential
(fixed rate – floating rate).

Whilst derivatives trading may be considered a zero-sum game, it is important to remember that this
is not an absolute truth. The financial markets are complex and multifaceted, with a range of
participants engaging in a variety of activities. While some trades may result in a simple transfer of
wealth from one party to another, the market as a whole is not purely competitive, and many
transactions serve important economic functions.
The stock market is an excellent example of a positive-sum game, often erroneously labelled as a
zero-sum game. This is a zero-sum fallacy: the perception that one trader in the stock market may
only increase the value of their holdings if another trader decreases their holdings.[21]

The primary goal of the stock market is to match buyers and sellers, but the prevailing price is the
one which equilibrates supply and demand. Stock prices generally move according to changes in
future expectations, such as acquisition announcements, upside earnings surprises, or improved
guidance.[22]

For instance, if Company C announces a deal to acquire Company D, and investors believe that the
acquisition will result in synergies and hence increased profitability for Company C, there will be an
increased demand for Company C stock. In this scenario, all existing holders of Company C stock
will enjoy gains without incurring any corresponding measurable losses to other players.

Furthermore, in the long run, the stock market is a positive-sum game. As economic growth occurs,
demand increases, output increases, companies grow, and company valuations increase, leading to
value creation and wealth addition in the market.

Complexity

It has been theorized by Robert Wright in his book Nonzero: The Logic of Human Destiny, that society
becomes increasingly non-zero-sum as it becomes more complex, specialized, and interdependent.

Extensions

In 1944, John von Neumann and Oskar Morgenstern proved that any non-zero-sum game for n
players is equivalent to a zero-sum game with n + 1 players; the (n + 1)th player representing the
global profit or loss.[23]

Misunderstandings

Zero-sum games and particularly their solutions are commonly misunderstood by critics of game
theory, usually with respect to the independence and rationality of the players, as well as to the
interpretation of utility functions. Furthermore, the word "game" does not imply the model is valid
only for recreational games.[5]

Politics is sometimes called zero sum[24][25][26] because in common usage the idea of a stalemate is
perceived to be "zero sum"; politics and macroeconomics are not zero sum games, however,
because they do not constitute conserved systems.

Zero-sum thinking

In psychology, zero-sum thinking refers to the perception that a given situation is like a zero-sum
game, where one person's gain is equal to another person's loss.

See also

Bimatrix game

Comparative advantage

Dutch disease

Gains from trade

Lump of labour fallacy

Positive-sum game

No-win situation

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23. Theory of Games and Economic Behavior (https://press.princeton.edu/titles/7802.html) .

Princeton University Press (1953). June 25, 2005. ISBN 9780691130613. Retrieved
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24. Rubin, Jennifer (2013-10-04). "The flaw in zero sum politics" (https://www.washingtonpost.co
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Further reading

Misstating the Concept of Zero-Sum Games within the Context of Professional Sports Trading
Strategies, series Pardon the Interruption (2010-09-23) ESPN, created by Tony Kornheiser and
Michael Wilbon, performance by Bill Simmons

Handbook of Game Theory – volume 2, chapter Zero-sum two-person games, (1994) Elsevier
Amsterdam, by Raghavan, T. E. S., Edited by Aumann and Hart, pp. 735–759, ISBN 0-444-89427-6

Power: Its Forms, Bases and Uses (1997) Transaction Publishers, by Dennis Wrong, ISBN 978-1-
56000-822-4

External links

Play zero-sum games online (http://www.egwald.ca/operationsresearch/twoperson.php) by

Elmer G. Wiens.

Game Theory & its Applications (https://web.archive.org/web/20070518035304/http://www.le.ac.

uk/psychology/amc/gtaia.html) – comprehensive text on psychology and game theory.
(Contents and Preface to Second Edition.)

A playable zero-sum game (http://economics-games.com/mixed-nash) and its mixed strategy

Nash equilibrium.

Positive Sum Games (https://www.edge.org/response-detail/10135)