Understanding the Prisoners' Dilemma
Cooperation between people, which is necessary for our survival and prosperity Opens in new window, normally requires a framework of institutions Opens in new window to discourage innate instinctual opportunism Opens in new window.
They decrease the risks of shirking and reinforce habits of cooperation for reciprocal benefit, and create trust.
People who cooperate are often better off than when they do not cooperate. This has been explored by game theory Opens in new window under the label of prisoners' dilemma.
Prisoners’ dilemma describes a situation in which two or more parties are worse off if they do not cooperate, but in which each party is tempted to go it alone, as the other party or parties cannot make credible commitments.
The term derives from the game-theoretical case where two prisoners are held captive in separate rooms and are not permitted to communicate with each other (cooperate).
When interrogated, each prisoner faces a dilemma Opens in new window in that he does not know whether to remain silent, hoping that his guilt cannot be established, or whether to speak out to pull all responsibility on the other prisoner and claim mitigating circumstances.
- Should he remain silent and hope that his guilt cannot be established, but risk that the other prisoner will incriminate him?
- Or should he speak out, incriminating the other and hoping for lenient treatment?
Both would be better off if they could. Then, each would then be able to make credible commitments to the other prisoner, for example promising each other that both will remain silent.
When they cannot communicate and speak out in self defense (defence), they incriminate each other and are both worse off. The matrix in Figure I clarifies what is at stake here.
Such prisoners’ dilemmas can arise when people are unable to cooperate reliably. Institutions Opens in new window then enhance the opportunities and chances of mutually beneficial cooperation.
A prisoners’ dilemma also arises in competition between suppliers who are inclined to underbid each other in order to attract buyers.
The suppliers would be better off as a group, if they cooperated, for example by forming a cartel. In this case, the dilemma serves good purposes for the community.
An instructive example that demonstrates the advantage of cooperation based on appropriate institutions was the history of the Cold War Opens in new window and the strategic arms limitation agreements that followed in the 1970s and 1980s.
As long as the two super powers did not cooperate, they were tied up in costly arms race and faced the danger of a nuclear holocaust.Both sides increasingly realized that both would be better off with some kind of cooperation.
They entered into negotiations to establish rules, monitoring procedures and sanctioned retaliations for rule violations. Eventually, they established credibility, which made cooperation possible. This solved their prisoners’ dilemma and allowed them to reduce the nuclear threat.
However, cooperation is not always desirable. Various suppliers of a product may, for example, find it beneficial to free themselves from the prisoners’ dilemma of having to compete by forming a cartel to fix prices at a high level.
In this instance, the prisoners’ dilemma of the suppliers serves a good purpose from the standpoint of potential buyers and the community at large, just as the classical case of a prisoners’ dilemma serves a good purpose from the viewpoint of the interrogator.
Whether to facilitate or impede cooperation by appropriate institutions Opens in new window depends on the circumstances and whose interests are included in the evaluation.