Zero sum games

[LightRider]

Competing to create the most efficient bomb gave us nuclear energy, the safest and cheapest power source mankind has ever harnessed.

Until a single nuclear plant is hit by a tsunami and radiates half the planet.

Coal kills many many thousands per year, Fukashima killed no-one.

Except for all the people slowly dying of cancer, all the wildlife affected similarly and the fact that it has created another uninhabitable zone. I suppose you think Chernobyl wasn't anything to worry about either.

[doldgigger]

It seems I touched a nerve when I said that getting better at playing a zero-sum game isn't a good way to make the world a better place.

I was thinking of day-traders at the time; people who don't care what asset they're buying and selling but just try to buy low and sell high to make a profit. Or high-frequency traders who try to be just a tiny bit faster executing transactions to take advantage of tiny inefficiencies in markets.

Probably I don't have a deep enough understanding of the value of liquidity in asset markets or a deep enough appreciation for their role in creating market prices, but it seems to me the world would get along just fine without them spending all their time and effort competing against each other.

I think an important extra characteristic of free markets apart from being zero-sum is (and at this point, deep understanding of speculation etc. becomes less important) that the market only provides the framework - people choose their own games. Which means that the profit one can make from day trading, margin trading, high frequency trading or whatever is only possible because someone else also engaged in the same game, resulting in him to pay for the profit. Which leaves two possibilities:

1. He engaged into the game because he was misinformed. In this case, he has the opportunity to learn from the mistake. And I think by not being debt-based, bitcoin makes this case less dangerous because people will be more likely only "gamble" with what they have, and not with their future earnings.

2. He knew what he did, so the possibility of loss was accepted in favour of some greater goal which the "game" (in this case, some kind of speculation market) serves.

Going away from the abstract argument above, I think high performance markets serve one important goal (the achievement of which was improved by bitcoinica): They allow liquidity to move even faster to that locations on the world where they are likely to be profitable. And by the argument above, on the long run profit will only be gained by doing something useful for the society.

[westkybitcoins]

Competing to create the most efficient bomb gave us nuclear energy, the safest and cheapest power source mankind has ever harnessed.

Until a single nuclear plant is hit by a tsunami and radiates half the planet.

Coal kills many many thousands per year, Fukashima killed no-one.

I can only imagine that that was a joke.

I have to agree with LightRider: there are definitely arenas (nuclear power, microbiology, etc.) that show that humanity needs to balance its (natural) pursuit of efficiency, development and growth with caution and a common-sense approach to risks. Considering its potential, I would think this applies to Bitcoin as well.

[Dansker]

It's helped bring down volatility.

These past months have been more stable than anything, and thats partly because of the volume and speed of the market I'd say.

[SpontaneousDisorder]

Competing to create the most efficient bomb gave us nuclear energy, the safest and cheapest power source mankind has ever harnessed.

Until a single nuclear plant is hit by a tsunami and radiates half the planet.

Coal kills many many thousands per year, Fukashima killed no-one.

I can only imagine that that was a joke.

I have to agree with LightRider: there are definitely arenas (nuclear power, microbiology, etc.) that show that humanity needs to balance its (natural) pursuit of efficiency, development and growth with caution and a common-sense approach to risks. Considering its potential, I would think this applies to Bitcoin as well.

The only joke is people have been evacuated from a reasonably safe environment because people are hysterical about radiation. The evacuation itself is probably more dangerous than the radiation.

People should have the choice to live in the radiation affected zones if they wish, just as they can smoke cigarettes death tax sticks if they wish. They would harm no-one in doing so. The great thing about Bitcoin is Bitcoinica harmed no-one, all costs were born by the speculators themselves. With Fiat money speculators pump up the money supply, inflating asset prices and make tonnes of money for themselves. Free markets don't have these problems.

[acoindr]

Adding liquidity to markets, which speculators do, is not zero-sum.

... Probably I don't have a deep enough understanding of the value of liquidity in asset markets or a deep enough appreciation for their role in creating market prices, but it seems to me the world would get along just fine without them spending all their time and effort competing against each other. ...

Let me explain the value of liquidity then, but first establish that you agree capitalism is a good thing? I would imagine you do. I also imagine you believe legitimate goods and service producing businesses are a good thing, both economically and for the world in general. If this is also true then the stock market, with its intended function of providing capital to promote business opportunity, is also a good thing.

Let's use as example Starbuck's coffee. Starbuck's utilized the stock market to grow a good local idea and establish a worldwide presence. In fact, one of their incentives for employees is owning stock in the company.

Starbuck's stock was hit hard by the economic downturn as the belief was people in recession would scoff at $5 coffee.

Imagine the majority of stock was held by mom and pop investors and speculation didn't exist at all. The likely result would have probably been a total crash of the stock's price as sellers wouldn't find any buyers. Many amateur investors would be wiped out with little chance of recovering their investment.

While investors do accept some risk of loss by investing in stocks, such harsh market conditions would likely scare off most mom and pop types. Such a market would be more rigid, less friendly and appealing, and therefore smaller.

Speculators, on the other hand, look for such pricing opportunities. Speculators would (and did) help establish a floor to the falling share price by offering a 'buy' side. Starbuck's stock has not only recovered but is now at all time highs.

This is a real world example of how speculators' liquidity can allow the stock market to be more appealing, and therefore larger. That's not zero-sum.

Could the world and market get along without speculators? Certainly, but that wasn't the question. Your argument is only having a "positive-effect" on the world, and that speculators do.

note: currently the stock market does not operate in true free market and is distorted by artificial money inflation, which reduces the need for speculators' liquidity.

... I wasn't thinking of competition in general as being a zero-sum game, because in general it is not.  Competition drives efficiency, and efficiency (creating more by using less) is what makes the world a better place -- assuming that the thing you're making more efficient has a positive effect on the world.  Competing to build the most efficient bomb or assault rifle is not a world-improving activity. ...

Would being the (smarter) side with better bombs and assault rifles be considered preferable and world-improving if they are used to stop a Hitler?

[Boussac]

I certainly did not embrace the cause of bitcoin to see it  associated even remotely to words like "margin trading".

This is when zero-sum becomes positive sum. We get rid of the looniest of liberals. Good riddance.

I am not going anywhere but I suggest you put me on your ignore list: I will happily reciprocate.

Nah, just kidding: we all know we are not going to build a base for bitcoin if it's craked by the political divide. By the way, I have absolutely no idea who "liberals" are.

[MarketNeutral]

note: currently the stock market does not operate in true free market and is distorted by artificial money inflation, which reduces the need for speculators' liquidity.

True, and is implicit in the Fed's new mandate to support the stock market.
Most stock market volume consists of robots trading with robots.
Further, we have the President's Group on Financial Markets.
http://en.wikipedia.org/wiki/Working_Group_on_Financial_Markets

[benjamindees]

Now can someone explain to me how I can speculate on par with JP Morgan using high frequency trading, commodity margin trading and what not ?
Oh, maybe THAT explains why Jamie Dimon paid himself 23 million dollars in 2011, in the midst of the biggest financial crisis since 1929.

I can.  First you need to become a FED Primary Dealer.  This gives you access to the discount window and the FED's various swap lines and other money at 0% interest.  With this oligopoly position, you can then obtain dollars and bonds at a discount, to sell to others at guaranteed profit.

Then the great thing is that this profit goes up during crises, when the Federal Reserve prints money in order to "bail out" the economy.  So all you need to do is create an artificial crisis via risky gambling with this free money, and you will get more free money and a huge salary.

This kind of paycheck is a tax on the real economy. Unlike state taxes it is not imposed by a democratically elected government but by a cynical group of people that can be best described as "speculators".

It is a tax.  But the tax is imposed by the Federal Reserve via inflation of the money supply, not the "speculators" at large banks who benefit from it.  The Federal Reserve is a quasi-government agency, and absolutely does wield government powers.  Without special legal exceptions, nearly everything they do would be considered fraud.

But this certainly has nothing to do with small speculators who don't have access to the Federal Reserve, Bitcoin speculators for instance.

[westkybitcoins]

Coal kills many many thousands per year, Fukashima killed no-one.

I can only imagine that that was a joke.

I have to agree with LightRider: there are definitely arenas (nuclear power, microbiology, etc.) that show that humanity needs to balance its (natural) pursuit of efficiency, development and growth with caution and a common-sense approach to risks. Considering its potential, I would think this applies to Bitcoin as well.

The only joke is people have been evacuated from a reasonably safe environment because people are hysterical about radiation. The evacuation itself is probably more dangerous than the radiation.

Well, clearly we have differing views on the magnitude of the Fukashima disaster and how widespread its effects have been. No point in harping on it in this thread.

People should have the choice to live in the radiation affected zones if they wish, just as they can smoke cigarettes death tax sticks if they wish. They would harm no-one in doing so. The great thing about Bitcoin is Bitcoinica harmed no-one, all costs were born by the speculators themselves. With Fiat money speculators pump up the money supply, inflating asset prices and make tonnes of money for themselves. Free markets don't have these problems.

Believe me, I'm not in favor of any sort of forceful intervention when it comes to peaceful people making poor choices. And yes, from what I know (never used it,) I do believe Bitcoinica was a legitimate way to interact with the market.

My call for caution goes beyond Bitcoinica though. What happens if naked short-selling becomes a sizeable portion of Bitcoin's markets? What if the desire to prevent such a thing leads to calls for government intervention? Should people take unwarranted risks just because they've been led to believe something is properly regulated by "authorities?" Taking a second to think these sorts of things through is simply a wise thing to do when it comes to a technology as potent as Bitcoin.

[Boussac]

But this certainly has nothing to do with small speculators who don't have access to the Federal Reserve, Bitcoin speculators for instance.

I do not speculate about who the bitcoin speculators are because I don't know.  

[Phinnaeus Gage]

Competing to create the most efficient bomb gave us nuclear energy, the safest and cheapest power source mankind has ever harnessed.

Until a single nuclear plant is hit by a tsunami and radiates half the planet.

Coal kills many many thousands per year, Fukashima killed no-one.

http://www.washingtonsblog.com/2011/12/study-fukushima-radiation-has-already-killed-14000-americans.html

[the joint]

Competing to create the most efficient bomb gave us nuclear energy, the safest and cheapest power source mankind has ever harnessed.

Until a single nuclear plant is hit by a tsunami and radiates half the planet.

Coal kills many many thousands per year, Fukashima killed no-one.

http://www.washingtonsblog.com/2011/12/study-fukushima-radiation-has-already-killed-14000-americans.html

Yep.  The problem with nuclear radiation is that it follows the laws of probability.

Let's say exposure to 20 rem will give 1 person cancer.  Interestingly, if 20 people are exposed to 1 rem, then 1 person will still get cancer.  If 200 people are exposed to .1 rem, then 1 person will still get cancer.  If 2000 people are exposed to .01 rem, then 1 person will still get cancer.

[muyuu]

Yep.  The problem with nuclear radiation is that it follows the laws of probability.

Let's say exposure to 20 rem will give 1 person cancer.  Interestingly, if 20 people are exposed to 1 rem, then 1 person will still get cancer.  If 200 people are exposed to .1 rem, then 1 person will still get cancer.  If 2000 people are exposed to .01 rem, then 1 person will still get cancer.

The distribution is different though. Regardless of the expected value of the number of cancer cases (originated from radiation) being the same, the possibilities of having more than exactly 1 case are a lot higher in the latter cases in your example than in the former ones.

When risk is inherently high (we are talking about cancer, not about something trivial) maximisation is done not for the average case but for a near-to-worst case. It's a non-trivial mistake many people make when programming betting bots or designing probabilistic strategies. You have to take into account high risk outcomes are not optimized towards purely an expected value (central average). For instance, in the case of a betting bot, risk increases exponentially as we over-leverage the bot - entering a betting sequence that can lead to bankruptcy has to be modeled after an exponential distribution and not a normal or a T-student one, since once you bankrupt it, it cannot possibly recover (it's a "fatal outcome"). The same scheme mathematically applies to investment strategies.

So no, the cases you expose are really not equivalent.

--------------------- Boring part you can skip follows. -----------------------

Taken to an extreme, you generally don't go all-in as soon as odds are slightly on your favour. This is a mathematically proven losing strategy and it's a classical naive mistake. You don't even maximise bernoulli squares or the Kelly criterion, typically.

Two trivial counter-examples:

- the loss is potentially much bigger than simply the lack of a win (like when risking cancer, one would possibly rather not play at all, it's a possible "move"). Mathematical models implying bernoulli trials assume an N-length sample, not a variable length sample up to a probabilistic end (a loss would follow a Poisson rather than a Binomial, which despite related is not equivalent).

- there might be players with bigger bank rolls capable of "martingaling" you out (Martingale is trivial a winning strategy when your bank is an order of magnitude bigger than that of your opponent, otherwise it's a quickly losing strategy). PS never use Martingale, it's retarded even when you have the bank to do it, this was just a trivial example. Rather than that you do the mathematically right thing by over-betting to the expected factor to almost ensure your smaller opponent is taken away by volatility.

[enquirer]

I think traders are good for bitcoin. They lose money (because it's not a zero-sum game for them, its negative sum game if you take exchange commissions into account). The money they lose goes to the exchange, which can invest into better infrastructure, security, and to lower the commission. It also works to reduce bid-ask spread, meaning better terms for "normal" buyers and sellers.

Gamblers also get something for their money, namely satisfy their speculating urges, we can regard that as entertainment value. Of course, it's bad if taken to the extreme (taking on debt, spending too much time on gambling).

[caveden]

http://www.washingtonsblog.com/2011/12/study-fukushima-radiation-has-already-killed-14000-americans.html

This is very questionable. See http://blogs.scientificamerican.com/observations/2011/12/20/researchers-trumpet-another-flawed-fukushima-death-study/