No registration required! (Why?)

Negative Sum Game

[Originally posted: 29 July 2006]

People often refer to trading as a zero sum game but it is not, it is a negative sum game.

A zero sum game is one where the sum equity or worth of all the players is the same at the end of the game as it was at the beginning. A good example of this is a game of poker with your friends at home. The amount of money that all of you have at the beginning of the game is the same as at the end. It's just been redistributed from the losers to the winners.

This is not the case with a game of poker at a casino. The house takes a rake for each hand played. This is the casino's cut and how they make money out of poker. Remember that the casino does not participate in the game of poker like they do in blackjack, the simply manage it, and for managing it they charge a fee. This is also why the casino wants to keep the game moving fast. The more hands they can process in an hour the more rake they can take and the more money they can make. I have heard it said that casinos don't make money out of poker and provide it as a draw card to get people into their casinos to play the other games. Personally I don't believe this and think that this is false propaganda spread by the casinos to give the impression that they're doing you a favor and to encourage you to play.

Just because casino poker is a negative sum game does not mean that you can't win at the game. The probability of any hand winning changes as more cards are dealt and you are playing against the minds and hands of the other players. In Texas Hold-Em you are provided with more cards at the flop, turn and river which add information to your hand and change the probability of winning. If you scientifically manage your hand with exact probabilities then you can maintain the best probability of winning throughout the game and manage your betting accordingly.

If everyone at the casino poker table manages their hands with perfect probability and money management then in the long run everyone will lose at the rate that the rake is taken. If you are playing casino poker then you are betting that the other players do not have a good probability strategy and/or money management strategy.

You will notice that the higher the stakes in poker the more seasoned the players are and the better probability strategies they use.

This is exactly how it is in trading. The more seasoned professionals have a better grip on the probability of an outcome and better money management techniques than the new traders. They are also playing in a negative sum game environment where commissions and other running costs eat into the profit of each trade. However, you are looking to outperform those traders with poor probability analysis and poor money management.