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Zero-sum game

math Maturity 5-7 Next article →

Imagine you are sharing one single cake with a friend. If you take a very large piece, your friend must receive a smaller piece. The total amount of cake stays exactly the same. In mathematics, we call this a zero-sum game.

The zero-sum three-person game
The zero-sum three-person game

This happens because one person's gain is equal to the other person's loss. If you add up all the wins and all the losses, the final sum is zero. This is why these are also called strictly competitive games. The total benefit for everyone involved does not change.

In these games, players are often trying to win points or money. One player wants to maximize their own profit. At the same time, the opponent wants to minimize that profit.

Interest Rate Swap Example
Interest Rate Swap Example

You can see this in many common activities. Games like chess, poker, and bridge are all zero-sum games. In a match, one person wins and another person loses. Even in financial markets, some things like options contracts work this way. Every dollar gained by one person is lost by someone else.

Math helps us find the best way to play these games. Two thinkers, Émile Borel and John von Neumann, found a clever way to solve them. They realized that players could use probability to make decisions. Instead of picking just one move, players can use a random device. This helps them pick moves based on certain chances. This method is called the minimax theorem. It helps players choose a strategy that minimizes their biggest possible loss.

The zero-sum three-person game
The zero-sum three-person game

There are also ways to find a steady balance in a game. This balance is called a Nash equilibrium. For a two-player zero-sum game, this can be found using linear programming. This is a mathematical way to solve problems with many rules. If a game has a payoff matrix, we can use it to find the best moves. A payoff matrix is just a chart that shows the results of different choices.

Interest Rate Swap Example
Interest Rate Swap Example

Using these tools, players can find the most optimal way to act.

Not every situation in life is a zero-sum game. Some situations are called non-zero-sum games. In these cases, the total amount of gain or loss can be more or less than zero. For example, two countries can trade extra bananas for extra apples. In this trade, both sides actually benefit from the deal. This is different from a zero-sum game where the pie cannot be made larger. Non-zero-sum games can be competitive or they can be non-competitive.

The zero-sum three-person game
The zero-sum three-person game
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File:The zero-sum three-person game.png
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Interest Rate Swap Example.png
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