Zero-Sum Thinking Traps
Don't get caught!
I think a lot of what leads people to mistaken reasoning and hence unsubstantiated views is the trap of zero-sum thinking.
Very simply a zero-sum game is one where there is a winner and a loser where the gain to the winner(s) equals the loss to the loser(s). Therefore, there is no net gain or loss.1 Examples would be a typical sports contest (team A wins and team B loses), binary games like Family Feud, chess, blackjack, etc., and multi-player (>3) contests with prizes or pots like poker.2 Arguably multi-player games with one winner but many losers still qualify as in the boardgame Trivial Pursuit where the one winner’s win is assumed equal to the combined losers’ losses . . . but I digress.
Most of our daily encounters beyond fun and games also resemble zero-sum events even if they don’t strictly qualify. When I let someone merge in front of me while commuting (or they cut me off), they “win” by being in front of me equal to my losing by being behind them. Choosing which route to take to work itself has a win-lose affect where the other player is a phantom me. So opportunity cost is zero-sum generally.
The stock market offers an interesting version of the fallacy of composition. Each individual trade is zero-sum: my profit is your loss when you’re on the opposite side of me. However, in aggregate and over time the stock market is a reflection of the positive-sum game that is economic exchange and value creation. The growth of the stock markets’ valuation is a gain to stockholders but a loss to no one. If you immediately have a hard time accepting that last statement, don’t fret. That is exactly what I’m getting at in this post—it is hard to transition from the zero-sum mindset to the positive sum.
Trade benefits both parties. That is the magic of free trade (between me and you, firm A and firm B, me and my grocer, you and a person/business in a foreign country, et al.).
Sure, people can and do misevaluate trade situations. I am at the store where in the checkout aisle I see a flashlight that looks very tempting. I put it in my cart implicitly assuming the flashlight will be more beneficial to me than the money I exchange for it. The store is offering it for sale with a similar expectation—that they can make a profit selling it as offered.
On the occasions that it turns out my expectations in such a purchase were incorrect, this isn’t altogether too interesting. So what if the flashlight sits in the garage unused until the batteries decay. Maybe I need to monitor my impulsive flashlight purchases a little more stringently. But this mistake is a rounding error in the scheme of my life.
The store too could be and will often purchase for resale merchandise that does not contribute profitably. The interesting part of this is not the individual cases but rather the store’s overall ability to make good decisions in this regard (i.e., be profitable). VERY interestingly the store’s long-term ability to be profitable and the degree to which it is profitable is a measure not just of how good it is at “winning” for itself but also it is a measure of how much its customers themselves are winning on the opposite side of those transactions! Again, positive-sum thinking requires a higher level of reasoning to understand this fact.
A zero-sum framework can lead us astray time and again. Some topical examples would be . . . international trade, immigration, workplace automation, and tax policy—where rather than a zero-sum game we have degrees of a negative-sum game; so pitfalls to avoid rather than opportunities to embrace in contrast to the other positive-sum examples in this list.
A more nuanced version would be in the realm of freedom of choice and property rights. It might seem that your neighbor choosing to paint his house a certain color where it is an unusual choice like hot pink is his gain—he likes it—and your loss—you hate looking at it. Just from a utilitarian perspective there is nothing in this hypothetical yet to determine if he should or should not be permitted this choice.
Oh, but you really hate it and surely he just kinda likes it. Plus, it will make his and your property values go down, don’t you know? This line of thinking assumes two things for the utilitarian argument to work that may not be true—that it will in fact decrease property values and that he cares about that. Not surprisingly, these arguable points are assumed away as you and your neighbors employ the power of the state to prohibit his choice in paint color.
The problem here is beyond the arrogant presumption that you and the neighbors know best. And we can set aside the bigger question of if you have any right to do this—could you prohibit his “ugly” kids from playing in the front yard?3
Beyond arrogance, the problem here is we risk thwarting a positive-sum structure by assuming a negative-sum world having started with zero-sum thinking. The property values claim rests on a foundation of freedom of choice. Prohibiting and restricting is explicitly NOT how free markets create value.
Yet again, Fear Of Others’ Freedom (FOOL)4 and Fear Of Others’ Mistakes (FOOM) in the name of preserving value and even worse creating value are the central-planning fool’s errand. It is the pretense of knowledge where it does not exist. Rather than managing a negative-sum world, prohibitions and restrictions on free choice and property rights create just such an environment. We may have to tolerate the occasional hot-pink house so as to enjoy all the other beneficial things a positive-sum arrangement can offer.5
In all these ways and more zero-sum thinking leads us to fallacious reasoning. It traps us into looking just at the obvious and immediate. It is the essential problem of the seen versus the unseen. To the Sowellian question, “And then what?” it stands puzzled and speechless.
This is setting aside complexities like utility (i.e., losses hurt more than gains feel good, or conversely, the benefits to the winner happen to be greater or lesser than the benefits (opportunity cost) to the loser (e.g., a poor person values an additional dollar more than a very rich person).). —— that was a lot of parentheses.
This is ignoring the rake, which would actually make poker a negative-sum game for the players themselves.
Before you say, “well, that’s absurd!” as if that is an argument, realize this is just a matter of degree with an extreme example chosen to make the point. Where is the line between his “bad” choice in paint and his “ugly” kids? I bet we can come up with an example that splits the united front of Neighbors Against Hot Pink Houses.
As always, hat tip to Arnold Kling.
And keep in mind that styles change. Yesterday’s monstrosity can become tomorrow’s “obvious” standard.