The Stock Market as a Game: An Agent Based Approach to Trading in Stocks

TL;DR

This paper challenges the common perception of stock trading as a zero sum game, emphasizing its nature as a positive sum game and exploring the implications of game theory in agent-based stock trading models.

Contribution

It clarifies the distinction between absolute and relative sum games in stock trading and critiques the prevalent zero sum representation in educational contexts.

Findings

Stock trading is fundamentally a positive sum game over time.

Recasting positive sum games as zero sum in relative terms can cause confusion.

The paper highlights the importance of explicit modeling in agent-based trading simulations.

Abstract

Just as war is sometimes fallaciously represented as a zero sum game -- when in fact war is a negative sum game - stock market trading, a positive sum game over time, is often erroneously represented as a zero sum game. This is called the "zero sum fallacy" -- the erroneous belief that one trader in a stock market exchange can only improve their position provided some other trader's position deteriorates. However, a positive sum game in absolute terms can be recast as a zero sum game in relative terms. Similarly it appears that negative sum games in absolute terms have been recast as zero sum games in relative terms: otherwise, why would zero sum games be used to represent situations of war? Such recasting may have heuristic or pedagogic interest but recasting must be clearly explicited or risks generating confusion. Keywords: Game theory, stock trading and agent based AI.