Prisoner’s Dilemma

Accountant

What is the prisoner’s dilemma?

The inmate’s dilemma is a paradox in decision analysis in which two individuals acting in their own interest do not produce the optimal result. The typical prisoner’s dilemma is set up in such a way that both parties choose to protect themselves at the expense of the other participant. As a result, the two participants find themselves in a worse state than if they had cooperated with each other in the decision-making process. One of the best-known concepts in modern game theory is the prisoner’s dilemma.

Key points to remember

  • An inmate’s dilemma is a situation where individual decision makers are always encouraged to choose in a way that creates less than optimal outcome for individuals as a group.
  • Prisoner dilemmas occur in many aspects of the economy.
  • People have developed many methods to overcome inmate dilemmas in order to choose better collective outcomes despite seemingly unfavorable individual incentives.

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The prisoner’s dilemma

Understanding the prisoner’s dilemma

The inmate’s dilemma presents a situation in which two parties, separated and unable to communicate, must each choose between cooperating or not. The highest reward for each party occurs when both parties choose to cooperate.

The classic prisoner’s dilemma is as follows: two members of a bank robber gang, Dave and Henry, were arrested and interrogated in separate rooms. The authorities have no other witnesses and can only prove the charges against them if they can convince at least one of the thieves to betray his accomplice and to testify to the crime. Each bank robber is faced with the choice of cooperating with his accomplice and remaining silent, or withdrawing from the gang and testifying for the prosecution. If they both cooperate and keep quiet, the authorities can only convict them for a lesser charge of loitering, which will mean one year in prison each (1 year for Dave + 1 year for Henry = 2 years in total prison) . time). If one testifies and the other does not, then the one who testifies will be released and the other will be three years old (0 years for the one who is missing + 3 for the condemned = 3 years in total). However, if the two testify against each other, each will receive two years in prison for having been partly responsible for the theft (2 years for Dave + 2 years for Henry = 4 years of total prison).

In this case, each thief is always encouraged to default, regardless of the choice of the other. From Dave’s point of view, if Henry remains silent, then Dave can either cooperate with Henry and serve a one-year sentence, or default and be released. Obviously, it would be better to betray Henry and the rest of the gang in this case. On the other hand, if Henry fails and testifies against Dave, then Dave’s choice becomes either to remain silent and make three years or to speak and make two years in prison. Again, obviously, he would prefer to do the two out of three years.

In either case, whether Henry cooperates with Dave or defaults on the charge, Dave will be better off if he himself defaults and testifies. Now, since Henry is faced with the same set of choices, it will also be better to defect as well. The paradox of the prisoner’s dilemma is as follows: the two thieves can minimize the total length of the prison sentence that the two will only do if they both cooperate (2 years in total), but the incentives to which they are confronted separately will always lead them each to defect and end up doing the maximum total prison time between the two (4 years in total).

Examples of the prisoner’s dilemma

The economy is full of examples of inmate dilemmas that can have positive or negative effects on the economy and society as a whole. The common thread is situations where the incentives faced by each individual decision-maker who chooses would encourage them to behave in ways that make them worse collectively, while individually avoiding the choices that would make them collectively better if everyone could. some sort of choose in cooperation.

One such example is the tragedy of the commons. It may be in everyone’s collective interest to conserve and reinvest in the propagation of a common natural resource so that they can continue to consume it, but each individual is always encouraged to consume as much as possible as quickly as possible, which then depletes the resource. Finding a way to cooperate would clearly improve everyone here.

On the other hand, cartel behavior can also be seen as a prisoner’s dilemma. All members of a cartel can enrich themselves collectively by limiting production to maintain the price each receives high enough to capture the economic rents of consumers, but each member of the cartel has an incentive to deceive the cartel and increase production to also capture rents from other cartel members. When it comes to the well-being of the society in which the cartel operates, this is an example of how the dilemma of a prisoner breaking the cartel can sometimes really improve society as a whole.

Escape the prisoner’s dilemma

Over time, people have found various solutions to inmate dilemmas in order to overcome individual incentives for the common good.

First, in the real world, most economic and human interactions repeat themselves more than once. A real prisoner dilemma is usually only played once, otherwise it is classified as an iterated prisoner dilemma. In a prisoner’s iterative dilemma, players can choose strategies that reward cooperation or punish defection over time. By interacting repeatedly with the same people, we can even deliberately move from a single inmate dilemma to a repeated inmate dilemma.

Second, people have developed formal institutional strategies to change the incentives that individual decision-makers face. Collective action to enforce cooperative behavior through reputation, rules, laws, democratic or collective decision-making and explicit social sanctions for defections transforms many of the prisoner’s dilemmas toward more collectively beneficial cooperative outcomes .

Finally, some people and groups of people have developed over time psychological and behavioral biases such as increased trust in each other, a long-term future orientation in repeated interactions and inclinations towards positive reciprocity of the cooperative behavior or negative reciprocity of defective behaviors. These trends can evolve through a kind of natural selection within a company over time, or a group selection through different competing companies. Indeed, they lead groups of individuals to choose “irrationally” the results which are in fact the most beneficial for all together.

Together, these three factors (repeated inmate dilemmas, formal institutions that break inmate dilemmas, and behavioral biases that undermine “rational” individual choice in inmate dilemmas) help resolve the many inmate dilemmas we face all faced differently.

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