Hey look! The Gutless Wonder has crawled out to play. Still lacks the testes to present itself honestly, though. A shame, but understandable -- sunlight blisters wickedly. I guess it ran out of shy transvestites to bully in front of its offspring. Meh. At any rate....
Anybody remember "consumer surplus" and "producer surplus"? These are the gains-from-trade that are not captured in a monetary accounting of a P*Q transaction. They are what comprise the difference between accounting profit (a positive expectancy) and economic profit (a $0 expectancy). Conflating accounting profit into economic profit produces mush. When we trade $10 cash for $10 of ANYTHING, we gain -- and the same thing holds for the other side of the trade. What the market sees is $10||$10 -- what the individuals see is surplus: gains-from-trade.
This is not the best explication, but maybe Adam Smith (via Dartmouth, via Columbia) can lend a (invisible) hand:
Anybody remember a least-squares regression? Why do we have to square the errors, if we're only going to take a square root in order to finish? It's because any set of positive differences and negative differences, when measured against a midpoint, produces a 'zero-sum' outcome by construction. An Index produces such an outcome, that does not make it a game any more than a regression produces (or stems from) a game.
Here's the sort of people who make this comparison:
But a game is a contest driven by rules which (are meant to) control participants. There are no contested proceedings in the make-up of an Index, no rules governing behavior, and your participants have only arbitrary membership. It *ain't* a game. An INDEX is NOT a GAME.
Lastly, Tournament Games produce the growing (or shrinking) payoff matrix that produces Win-Win runs in the stock market, or takes away those wins -- like when the headlines read "$1B of wealth was stripped away from AAPL shareholders today, when...." That is describing a repeated game with a provision that the payoff matrix contains a recursive element that brings past outcomes forward in time. Not a hard concept. Such a game has "memory" and those who claim a market to be "random" have to fight off the reality of the tournament nature of the market with every breath.
So! Only 3 things to keep in mind, to not look foolish discussing game theory:
1) Gains-from-trade: accounting profits do not have economic surpluses (consumer or producer)
2) Whether a game is positive-sum, negative-sum, or zero-sum, depends ONLY on whether the game being played increases, decreases, or does not affect the wealth brought to the table. There is no necessary attribution for what is being traded -- it's only a label.
3) For markets, repeated trade gives us a tournament function, where "memory" of prior games (in outcomes, and in "reputation" for players) has an opportunity to produce the societal wealth gain of a rising market, or the wealth loss of a sinking market.
Anybody remember "consumer surplus" and "producer surplus"? These are the gains-from-trade that are not captured in a monetary accounting of a P*Q transaction. They are what comprise the difference between accounting profit (a positive expectancy) and economic profit (a $0 expectancy). Conflating accounting profit into economic profit produces mush. When we trade $10 cash for $10 of ANYTHING, we gain -- and the same thing holds for the other side of the trade. What the market sees is $10||$10 -- what the individuals see is surplus: gains-from-trade.
This is not the best explication, but maybe Adam Smith (via Dartmouth, via Columbia) can lend a (invisible) hand:
Anybody remember a least-squares regression? Why do we have to square the errors, if we're only going to take a square root in order to finish? It's because any set of positive differences and negative differences, when measured against a midpoint, produces a 'zero-sum' outcome by construction. An Index produces such an outcome, that does not make it a game any more than a regression produces (or stems from) a game.
Here's the sort of people who make this comparison:
Lastly, Tournament Games produce the growing (or shrinking) payoff matrix that produces Win-Win runs in the stock market, or takes away those wins -- like when the headlines read "$1B of wealth was stripped away from AAPL shareholders today, when...." That is describing a repeated game with a provision that the payoff matrix contains a recursive element that brings past outcomes forward in time. Not a hard concept. Such a game has "memory" and those who claim a market to be "random" have to fight off the reality of the tournament nature of the market with every breath.
So! Only 3 things to keep in mind, to not look foolish discussing game theory:
1) Gains-from-trade: accounting profits do not have economic surpluses (consumer or producer)
2) Whether a game is positive-sum, negative-sum, or zero-sum, depends ONLY on whether the game being played increases, decreases, or does not affect the wealth brought to the table. There is no necessary attribution for what is being traded -- it's only a label.
3) For markets, repeated trade gives us a tournament function, where "memory" of prior games (in outcomes, and in "reputation" for players) has an opportunity to produce the societal wealth gain of a rising market, or the wealth loss of a sinking market.
NOT a prediction.
