Why do people make decisions that don’t seem to make sense?
One answer, which comes from game theory, is called the prisoner’s dilemma. The prisoner’s dilemma explains why people make decisions which are good for themselves but not for the team. Even if you didn’t learn about it in economics class, you’ll probably recognize the prisoners’ dilemma from TV cop shows. Here’s how it works:
The police have enough evidence to convict two criminals of a minor crime. The police suspect the criminals have also committed a major crime but don’t have enough evidence to convict them. To extract a confession, the police question the suspects separately and offer them each an identical deal. The deal is something like this:
We already can lock you up for a year for the minor crime. And we’re going get you on the major crime and put you away for 20 years. However, if you confess to the major one and implicate your partner, we will give you immunity and you won’t have to go to jail at all. But you better hurry because we’re making the same offer to your partner. And if you both confess, the immunity deal is off. We’ll give you both 8 years since we avoid a trial.
The criminals’ best option is for neither of them to confess. Without one of them confessing, they won’t get convicted of the major crime and will only go to jail for one year for the minor crime. However put yourself in the shoes of Criminal A who doesn't know what the other Criminal B will do. If he thinks Criminal B will confess, then Criminal A should also confess so he gets 8 years in jail, rather than 20. If he thinks Criminal B won’t confess, then Criminal A should confess anyway; by taking the deal, he gets off without any jail time. So regardless of what the other criminal does, the best option for Criminal A is to confess.
Criminal B faces the exact same choices and independently comes to the same conclusion to confess. In the language of game theory, they are employing a minimax strategy – minimizing their maximum loss. Both confess to the major crime and go to jail for 8 years, even though they could have limited it to one year if neither had confessed.
The prisoners’ dilemma shows why two people or companies might not cooperate even when it is in their collective best interests. Despite its name, the dilemma applies to a wide range of situations in business.
Consider the classic example of the co*ke v Pepsi cola wars. Each have similar market share for a price-sensitive commodity. If one of them lowers prices to gain customers, the other is likely to do the same. As a result, neither of them gains momentum but ends up with lower prices. This is analogous to the prisoners confessing when they should remain silent. The best option for both co*ke and Pepsi is to keep prices as-is but the reality of perpetual promotions shows they both fall prey to the prisoner’s dilemma.
The prisoner’s dilemma also explains why OPEC has had a hard time keeping oil production and therefore prices high. It’s frequently cited as the cause for arms races between superpowers and unsustainable military investment between rival nations. The prisoner’s dilemma is even a plausible explanation for illegal doping in sports. In all three cases, one person/company acts in their own interest because they believe everybody else will.
The prisoner’s dilemma may explain all of these situations but it doesn’t justify them. As everyone’s mother said when they were young: Just because your friends jump off a bridge, doesn’t mean you should too.
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FAQs
So, your best strategy, no matter what your partner does, is to defect (confess). Since the outcomes of your confession are better than the outcomes of not confessing, this is called a strictly dominant action.
How to beat the prisoner's dilemma? ›
There are two primary solutions to the prisoner's dilemma. The first is introducing repetition, so that when Ahmad observes iElectronics cheating today, it can punish him tomorrow. The second is external enforcement, whereby a third party enforces good behaviour by wielding a capacity to punish cheaters.
What is the prisoner's dilemma easily explained? ›
The prisoner's dilemma presents a situation where two parties, separated and unable to communicate, must each choose between cooperating with the other or not. The highest reward for each party occurs when both parties choose to co-operate.
What is a prisoner's dilemma quizlet? ›
What is a prisoner's dilemma? a game in which players act in rational, self-interested ways that leave everyone worse off.
What is the best outcome in prisoner's dilemma? ›
In the classic example, two prisoners can each choose to confess or not to a crime, and their decisions will determine the length of their sentences. The best outcome for both is to stay silent, but the possibility that the other will confess leads them both to incriminate themselves.
Can you win the prisoners dilemma? ›
When you're playing against only 1 other player, the optimal strategy is to Always Defect, because you're guaranteed to win or tie. When you're playing against multiple other players, Tit For Tat becomes optimal, if you can team up and benefit from cooperation while also defending against Always Defectors.
What is the prisoner's dilemma used to explain? ›
A prisoner's dilemma describes a situation where, according to game theory, two players acting selfishly will ultimately result in a sub-optimal choice for both. The prisoner's dilemma also shows us that mere cooperation is not always in one's best interests.
What is the moral of the prisoner's dilemma? ›
Benefiting oneself is not always wrong, of course, and benefiting others at the expense of oneself is not always morally required, but in the prisoner's dilemma game both players prefer the outcome with the altruistic moves to that with the selfish moves.
What is the main lesson of the prisoners dilemma game? ›
The iterated prisoner's dilemma shows that acting in your self-interest may not lead to an optimal outcome. In most life cases, cooperating always gives a better outcome for everyone. During initial interactions, there is an incentive for both parties to be noncooperative and try to get the best outcome for themselves.
What are some examples of prisoner's dilemma? ›
For example, two prisoners are given a choice to either confess to their crime or remain silent. If one confesses and the other remains silent, the silent one will receive the full punishment, and the one who confesses will go free. If they both confess, they will receive a moderate punishment.
The Prisoner's Dilemma (PD) is one of the most popular concepts amongst the scientific literature. The task is used in order to study different types of social interactions by giving participants the choice to defect or cooperate in a specific social setting/dilemma.
Who thought of the prisoner's dilemma? ›
The Prisoner's Dilemma (henceforth, 'PD') figures prominently in game theoretic literature. It was first devised and discussed by Merrill Flood and Melvin Dresher in 1950, in the context of studies pursued by the RAND Corporation on strategic interaction (see Poundstone, 1992).
What is the most effective strategy for overcoming the prisoner's dilemma? ›
Thus both game theory and evolutionary dynamics agree on the fact that the best strategy in the PD is to defect. Remarkably, the standard RE always favours defectors over cooperators whenever T > R > P > S, independently of their relative values.
What is the most likely outcome of the prisoner's dilemma? ›
The most likely outcome of the prisoner's dilemma is for both prisoners to cooperate with each other.
What is the main point of prisoner's dilemma? ›
The prisoner's dilemma elegantly shows when each individual pursues their own self-interest, the outcome is worse than if they had both cooperated. In the above example, cooperation—wherein A and B both stay silent and do not confess—would get the two suspects a total prison sentence of two years.
