A zero-sum game is any interaction in which one person’s gain results in an equivalent loss for another participant. This concept, central to game theory, is characterized by the absence of net gain: what one gains, another loses. In this article, we explore the concept of zero-sum game in the context of finance, its impact and its practical application in specific investment strategies and transactions.
Zero-sum games in finance
Chess is a classic example of a zero-sum game, where one player’s victory is exactly equal to the other’s defeat. In finance, some transactions are also considered zero-sum games, such as trading futures and options or forward contracts. These agreements are bilateral agreements in which one party gains exactly what the other loses, at the time of execution. For example, in a forward contract on oil, if the price rose, the buyer wins and the seller loses in equal proportions. The same thing happens if there were calls or puts. A call or call option is a contract that gives its owner the right to buy an asset on a certain date for a certain price, while a put or put option is a contract that gives the owner the right to sell an asset. on a given date at a given price. On the other hand, when the interest rate and the devaluation rate are guaranteed and monopolized in advance in the decision, the deal is a success.
Although some aspects of the financial market can be classified as zero-sum games, most economic transactions are considered “non-zero-sum games.” In these cases, both parties can benefit, as occurs in trade, where the goods or services exchanged are perceived as more valuable than the costs associated with them. Classic examples of non-zero sum include long-term investments, which generate jobs, income and economic growth.
Game theory provides a theoretical framework for analyzing zero-sum games.
In “Game Theory and Economic Behavior” (1944), John von Neumann and Oskar Morgenstern laid the foundation for the field. The Nash equilibrium, developed later, describes a state in which no player improves his position by unilaterally changing his strategy. This principle is particularly relevant in competitive financial markets, where participants seek to optimize their returns without significantly altering market conditions.
Practical Case: “La Tablita de Caputo” in 2024
In 2024, Economy Minister Luis Caputo implemented a policy known as “la tablita,” based on a crawling peg scheme. This approach generated results typical of a zero-sum game: some large market players made extraordinary profits, while other micro savers experienced significant losses.
Winners
- Treasury Bonds in pesos: The TO26 bond recorded a return of 236.6% in pesos, equivalent to a gain of 176% in dollars after considering the exchange rate evolution.
- Banking stocks: Entities such as Grupo Financiero Galicia and Banco Macro led the increases in the Merval index, which increased 127% in dollars.
- UVA fixed term: This tool, adjusted for inflation, offered returns of 150%.
- Financial speculation: The liberalization of financial markets created fertile ground for speculation. Interest rates in pesos translated into dollars attracted “swallow capital” that made extravagant profits.
- Local banks: The profitability in dollars and without risk of the local banks that agreed on rates in pesos, translated into dollars, were extravagant.
- The large economic conglomerates: They took advantage of the gap between interest rates and “pre-announced devaluations” to obtain extraordinary income. They have debt capacity and relationships with foreign entities and dedicated themselves to “carry trade” full time.
Losers
- Exporters and companies dependent on the exchange rate: These entities faced losses due to the appreciation of the peso, which reduced their competitiveness. Proof of this is the default of a powerful group in the soybean complex.
- Small savers: Many savers who have been saving in dollars in Argentina for 50 years did not have access to the most profitable financial instruments, leaving them exposed to the largest hyperinflation in dollars in history.
- Argentine Industry: The overvaluation of the peso favored imports, harming the national industry.
- Increase in internal debt: The financial move, as of December 31, accumulated an increase in public debt of around US$91 billion.
- National companies: The industries and SMEs that financed themselves in the local market assumed a devastating “financial cost converted into dollars.” The exuberant profits in dollars of the peso dealers do not compare with the immeasurable active interest rates of those who took out credit. There is no company that survives at a floor financial cost of 40% in dollars anywhere in the world.
- Inflation and regressive redistribution: The inflationary flare that caused the early devaluation destroyed the income of the most vulnerable sectors of the population; retirees, salaried workers, informal workers.
- Future generations: The accumulation of debt reaches levels of uncertain sustainability, becoming a mortgage for future generations.
- Prolonged recession: The fall in industrial activity generated an increase in unemployment and job insecurity.
- Income concentration: The transfer of resources to the financial sector consolidated a regressive model of income distribution, widening the gap between rich and poor.
- GDP collapse: around 3% of GDP (p.)
- Collapse of Domestic Demand: Household consumption, government spending and investment collapsed.
Impact of the zero-sum game
The zero-sum game in finance and even in this type of neo-quantitativist macroeconomic approaches, directly and negatively influences general well-being. Price fluctuations, driven by decisions of those who exercise the greatest power (supply), have reflected the dynamics inherent in this model.
The nature of the zero-sum game intensified the winners’ exploitation of cost and price gaps and timing. The sudden movements in released prices created unusual profit opportunities, never seen in the balance sheets and results tables of food, financial, and energy companies, but they also increased social risks considerably with losses that influenced families that lost their medical coverage. , they lowered the quality of food and suppressed all kinds of recreation during leisure time.
Understanding the rules of the zero-sum game is essential to designing effective investment strategies to transfer income in a fierce manner. Successful investors took advantage of the access since the Minister of Economy guaranteed victory to the winners.
Epilogue
The financial speculation promoted by the government not only resulted in a devastating scheme for the most vulnerable sectors of the economy, but also deepened the country’s structural inequalities. This economic-financial model, based on a logic of asymmetric force, functioned as a zero-sum game in which the well-being of the most powerful few was ensured at the expense of the misfortune of the great majority. The incomes of the most vulnerable sectors were relentlessly eroded, while actors with privileged access to the financial system captured disproportionate profits.
Ultimately, this dynamic not only compromised economic stability, but also threatened the social fabric, exacerbating poverty and consolidating a regime of structural exclusion. The Argentine experience shows that an economic system that prioritizes speculation over production and work only leads to economic stagnation and profound social deterioration.
References
- Nash, J. (1951). Non-Cooperative Games. Annals of Mathematics.
- Neumann, J. von, & Morgenstern, O. (1944). Theory of Games and Economic Behavior. Princeton University Press.
Director of Esperanza Foundation. https://fundacionesperanza.com.ar/ UBA Postgraduate Professor and Master’s Degrees at private universities. Master in International Economic Policy, Doctor in Political Science, author of 6 books
Source: Ambito
