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Ask HN: Why be an option/futures/day trader when it is zero-sum?

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Re: Ask HN: Why be an option/futures/day trader when it is zero-sum?

#31

Post by muerdeme »

brentr wrote: post #25
muerdeme wrote: post #24

Earlier quoted context omitted.

I was thinking that, because the market created value, it couldn't be zero or negative sum. Now I realize that it's negative sum within the scope of the market itself, even though it may create value in a grander scheme of things.

To truly understand the implications of game theory applied to the financial markets, you should look up the concept of Pareto improvements and Pareto optimums.

Good call. My roommate and I are about to start an econ discussion site. Shoot me an email if you're interested in helping us get conversation started or just have any suggestions for us.

Re: Ask HN: Why be an option/futures/day trader when it is zero-sum?

#33

Post by brentr »

muerdeme wrote: post #31
brentr wrote: post #25

Earlier quoted context omitted.

To truly understand the implications of game theory applied to the financial markets, you should look up the concept of Pareto improvements and Pareto optimums.

Good call. My roommate and I are about to start an econ discussion site. Shoot me an email if you're interested in helping us get conversation started or just have any suggestions for us.

Email?

Re: Ask HN: Why be an option/futures/day trader when it is zero-sum?

#34

Post by breck »

paulgb wrote: post #28
nostrademons wrote: post #21

Earlier quoted context omitted.

90% (actually, about 98%) of American drivers are above average, owing to a statistical quirk. There are 6 million car accidents in the U.S. each year, out of roughly 240 million vehicles. At a minimum, that means that 97.5% of drivers get in no accidents that year. They join the big bulge of people who are "average", having perfect driving records or only an accident a decade or so. Accident frequency is a power law…

Sure, but that only works because you've chosen a discrete measure of how "good" a driver is. If you defined a "good" driver by some other measure (say, a function of risky behavior and fuel consumption), then 50% of drivers would be above the median and 50% would be below, by definition.

All 3 of you are right.

Re: Ask HN: Why be an option/futures/day trader when it is zero-sum?

#35

Post by muerdeme »

brentr wrote: post #33
muerdeme wrote: post #31

Earlier quoted context omitted.

Good call. My roommate and I are about to start an econ discussion site. Shoot me an email if you're interested in helping us get conversation started or just have any suggestions for us.

Email?

See profile, forgot that it doesn't show.

Re: Ask HN: Why be an option/futures/day trader when it is zero-sum?

#37

Post by brentr »

yummyfajitas wrote: post #22
hugh wrote: post #13

Earlier quoted context omitted.

Except the companies don't see any of the money once the IPO is finished. Of course, the only reason the IPO can proceed is because people who buy shares know that they can sell them to other people later. So I suppose in that sense they help. However, once the market already exists, no extra value is created by an extra trader entering it. As others have pointed out though, there genuinely is value created by the op…

Well, companies do sometimes make further public offerings. Stock trading also provides a somewhat objective measure of the value of the company. For instance, if MS wants to buy Yahoo, how much should they offer? Without the stock market, it's tough to tell if they are lowballing or paying a premium.

You're spot on that the market is a means of both creating information and disseminating information. Information is key to game theory. That's where sigma algebras and filtrations start to creep into theory.

Re: Ask HN: Why be an option/futures/day trader when it is zero-sum?

#38

Post by brentr »

xlnt wrote: post #26

speculation done right consists of creating knowledge about what resources will be in what demand in the future, and then saving resources that are cheap now but will be expensive later. doing this raises the price a bit now (b/c you buy a bunch) and lowers it then (b/c supply is higher then). you make money smoothing out price fluctuations. this is a valuable service -- price fluctuations can really hurt people or c…

I'm guilty of not creating a distinction between speculation and investing. Technically, investing done right consists of creating knowledge about what resources will be in what demand in the future. A speculator plays a mere hunch. The distinction lies in the amount of information processed in the decision formulation. A good discussion of the dichotomy between a speculator and an investor can be found in Graham and Dodd's Security Analysis.

Re: Ask HN: Why be an option/futures/day trader when it is zero-sum?

#39

Post by a-priori »

getp wrote: post #3

The irrationality you are referring to is called the self-serving bias (SSB). I wrote a thesis on overconfidence for my master in behavioral economics, and the two are related. SSB is a well-documented bias. For instance, 90% of American drivers think they are in the top 50%. It's hard for people to fully appreciate this fact. Allow me to illustrate. Do you still consider yourself, even after reading this statistic,…

I know I'm in the bottom 50% of drivers: I only have a G1 license (i.e, Ontario's "learner's permit"). ;-)

Re: Ask HN: Why be an option/futures/day trader when it is zero-sum?

#40

Post by mattmaroon »

It's not uniformly irrational or unprofitable to enter a zero sum game. I made a great living for over 5 years playing a zero sum game, and know lots of people who have done it for far longer. Not options trading though. That one in particular I can't speak to.

It's often not that hard to prove within a reasonable certainty that you are a winner (or at least were one), depending on the variance. I haven't looked into the coefficient of variation of options trading though. I might one day.

Also, whether or not something is competitive has nothing to do with whether or not it is a zero sum game. It is generally just a factor of how much money can be made. The software industry is not zero sum, but is highly competitive. Low stakes poker tables are zero sum, but are not competitive at all.

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