Money and Zero-Sum games

In a two-way barter trade, two people (1 and 2) exchange two objects (A and B). From the voluntary nature of the transaction, we conclude that both people value their new possessions more than their old; to one person A > B while to the other B > A. These two statements contradict each other, but that’s okay because they apply to different people; Person 1 prefers A to B while Person 2 prefers B to A. In fact, this contradiction is what makes trade possible. At this point, there is little temptation to label either person as being wrong.

Now imagine that prior to the trade, the two people had in fact just walked out of the same store, having bought the objects of the trade in the store. At best, if both objects cost the same, the trade seems pointless. In all other cases, one of the people could have done better by just paying less for his post-trade object in the store. This untaken better option prompts us to label the choice as irrational.

In the first case, we had no problem believing that people could have differing preferences for objects. In the second case, however, once the objects acquired price tags, it seemed stupid to trade something with a higher price for one with a smaller price. The way I presented it, the objects were actually cash in the recent past, and trading any two amounts of cash for each other is clearly irrational because the numerically larger amount can always do more.

I wrote this essay to clear up some confusion regarding the zero-sumness of the stock market. In that case, the object A is a stock certificate while object B is money. The question is basically whether stock has an objective price independent of the buyer. If such a thing existed, then every successful stock sales means either the buyer or the seller has made a pricing mistake.

Conclusion? I don’t know. I’ve distilled it as far as I can.

3 Responses to “Money and Zero-Sum games”

  1. wakaba says:

    Huh. Can’t we say stock trades take place because of exogenous price changes?
    fundamentals change => prices change => investors preference orderings change => trade takes place.

  2. Mark says:

    When buying & selling stocks, aren’t you making a prediction about how much the stock is going to be worth in the FUTURE? Maybe I’m not getting your point.

  3. chiaolun says:


    I am asking why two people would arrive at a different price for the same stock. I see two types of of reasons – subjective ignorance or intrinsic preference differences due to, for example, differences in risk appetite.