Negotiation, Negotiation, Negotiation

UK Property Investment news and comments from Mark Harrison of YourPropertyExpert.com

Winners without losers

Posted by markharrison on April 25, 2008

Back in February, I wrote about the concept of the zero-sum game (specifically as it applied to SEO, which is such a thing.) That’s one of the most popular posts ever on this blog (!)

However, it’s also widely misunderstood – one commenter wrote:

How can there be a winner if there’s not a loser?

I wrote a comment back, but I think it’s time to expand on that a little…

The whole capitalist economy is founded on the idea of turning low-value stuff into high-value stuff.

Sand is one of the cheapest things in the world, but silicon chips are valuable and needed to keep the Internet running. So if Intel pay someone to work in a chip factory, turning sand into Pentiums, who loses?

If Steph the 18-year-old decides to train in medicine and becomes a doctor rather than going unemployed, who loses? Even if she has to pay for her education, does the University lose? Does she lose? Do her future patients lose? Even if the taxpayer foots the bill, do we all “lose” because we have a doctor rather than a beggar in the community???

Take another example – my grandfather died before TVs were affordable. My friends grandfather had a black and white TV, and died before colour TVs were affordable. Now I have a 32″ telly (which I hardly ever watch, to be honest), and he has a 42″ plasma – does that mean I’ve “lost” because my telly isn’t as big as my friend’s? Or does it mean that we’ve both won, because both of us have far higher living standards that our grandparents?

If you compare yourself to others around you, and focus on the few things they have that are better than yours, and decide that therefore you’re a loser, that’s very, very, sad.

Been on holiday in the last 2 years? Did you fly? If so, you’ve had a standard of living that was restricted to Millionaires in the 1940s (which is when my parents were born.)

Am I a loser because my brother flies more times a year than me? Or a winner, because for a few hundred quid, I can get to places that were just the stuff of books to my grandparents?

House pricing is another area where things are complex: Is everyone worse off because houses are worth more? Is everyone better off?  It’s not that simple.

When prices rise:

  • Property investors do well, because they have more equity that they could “realise”
    by selling.
  • Home-owners feel better off because they perceive their house is worth more, but could only realise that gain by selling (at which point they’d have to do something else – buy another house, rent, live with friends, etc.)
  • Those who don’t own homes aren’t actually any worse off, because they didn’t own a home before, and still don’t, but they feel worse off because it’s going to become harder for them to do so.

When prices fall, the opposite happens.

With property prices, in terms of how people feel at least, there are lots of winners and losers… but it’s a lot more complex than a zero-sum game… Just because my property has risen in value doesn’t mean that yours has fallen.

One Response to “Winners without losers”

  1. Justin Knight said

    I cannot agree more with your comment on the complexity of the real world versus zero-sum games. In general, the concept of zero-sum games is limited to mathematical and logical constructs and is very rare outside of gambling. As a professional in the derivatives markets, I often have people telling me that a derivatives contract is a zero-sum game. Were one to limit the focus to a single contract, this would be true, but is almost certainly not true in general. For example:

    Tom agrees to sell £100 to, and buy euros from, Dick at 1.26 euros to the pound in one month’s time. If the value of the pound rises to 1.27 euros over the month, Tom loses 1 euro and Dick makes 1 euro. If the value of the pound falls to 1.25 euros, the opposite is true. On the face of it, it is a zero-sum game.

    However, Tom happens to be widget wholesaler who imports his widgets from the euro-zone and pays for them in euros, while selling them on to retailers who pay him in turn in sterling. He has an order for £100 worth (on a cost price basis) of widgets and is worried that a fall in the value of sterling versus the euro over the month will eat into his margins. As a result, he sells sterling on a forward basis, and now knowing what rate he will get for it, he no longer cares about the exchange rate. This is in contrast to Dick who does care because he speculating on the value of sterling. It is no longer a zero-sum game, as one of the counterparties is using the exchange rate as a hedge to an existing exchange-rate exposure. On top of this, we find out that Dick is not actually speculating on the value of sterling over a month, he is speculating on the value of sterling for delivery in a month’s time over one day. In other words, he thinks sterling is going to rise versus the euro over the next 24 hours and expects to cover his position the following day and gives not a jot what happens to sterling over a whole month. So, not only are the counterparties trading for completely different reasons, they are trading over completely different periods.

    So, one can see how the intellectually-pure concept of a zero-sum game gets muddied in all but a very small number of cases. Put simply, unless one factors in opportunity loss or gain into the process (e.g. that Tom “lost” in the example above because he did not hedge his exposure at the very best moment – and which would render the whole concept meaningless), true examples of zero-sum games in the real world are as rare as unicorn eggs.

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