• what is the difference between zero sum and nonzero sum environments

Dixit, Avinash K. New York: W. Straffin, Philip D. Game Theory and Strategy. Washington, D. This is in direct contrast to a Zero-Sum Game where one party's win necessitates another party's loss, such as in competitive games like basketball, where if one team wins, the other automatically loses. A classic example of a Non-Zero-Sum Game situation is called the Prisoner's Dilemma, where two prisoners are interrogated separately, and are offered a bargain where if one confesses, he is set free, while the other prisoner is convicted for 10 years.

If both confess, they both face 2 years in prison. What Is a Zero-Sum Game? Key Takeaways A zero-sum game is a situation where, if one party loses, the other party wins, and the net change in wealth is zero. Zero-sum games can include just two players or millions of participants. In financial markets, futures and options are considered zero-sum games because the contracts represent agreements between two parties and, if one investor loses, then the wealth is transferred to another investor.

Most transactions are non-zero-sum games because the end result can be beneficial to both parties. Compare Accounts. The offers that appear in this table are from partnerships from which Investopedia receives compensation. This compensation may impact how and where listings appear. Investopedia does not include all offers available in the marketplace. Related Terms Matching Pennies Definition Matching pennies is a basic game theory example that demonstrates how rational decision-makers seek to maximize their payoffs.

Game Theory Definition Game theory is a framework for modeling scenarios in which conflicts of interest exist among the players. What Is the Centipede Game?

The centipede game in game theory involves two players alternately getting a chance to take the larger share of an increasing money stash. What Is the Traveler's Dilemma? The traveler's dilemma demonstrates the paradox of rationality—that making decisions illogically often produces a better payoff in game theory. What Is a Dollar Auction? A dollar auction is a non-zero-sum sequential game where the highest bidder receives a dollar and the loser must pay the amount that they bid as well.

Nash Equilibrium The Nash Equilibrium is a game theory concept where the optimal outcome is when there is no incentive for players to deviate from their initial strategy. Cutting a cake is zero- or constant-sum because taking a larger piece reduces the amount of cake available for others.

Situations where participants can all gain or suffer together, such as a country with an excess of bananas trading with another country for their excess of apples, where both benefit from the transaction, are referred to as non-zero-sum. Other non-zero-sum games are games in which the sum of gains and losses by the players are always less than what they began with, such as in a game of poker played in a casino in which a cut is taken by the house.

The concept was first developed in game theory and consequently zero-sum situations are often called zero-sum games though this does not imply that the concept, or game theory itself, applies only to what are commonly referred to as games. Optimal strategies for two-player zero-sum games can often be found using minimax strategies.

This suggests that the zero-sum game for two players forms the essential core of mathematical game theory. The most common or simple example from the subfield of Social Psychology is the concept of " Social Traps.

Non-zero-sum situations are an important part of economic activity due to production , marginal utility and value. Most economic situations are non-zero-sum, since valuable goods and services can be created, destroyed, or badly allocated, and any of these will create a net gain or loss. One strategy for non-zero-sum games is tit for tat. If a farmer succeeds in raising a bumper crop, he will benefit by being able to sell more food and make more money.

The consumers he serves benefit as well, because there is more food to go around, so the price per unit of food will be lower. Other farmers who have not had such a good crop might suffer somewhat due to these lower prices, but this cost to other farmers may very well be less than the benefits enjoyed by everyone else, such that overall the bumper crop has created a net benefit.

The same argument applies to other types of productive activity.