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What is the Prisoner's Dilemma, and How Does It Work?

What is the Prisoner's Dilemma, and How Does It Work?

The Prisoner’s Dilemma is a concept in game theory where two individuals, who can not communicate, must decide whether to cooperate or betray each other. The dilemma arises from a conflict between self-interest and cooperation, which leads to less-than-ideal results. In this blog, you will learn what a prisoner’s dilemma is, how it works, and what its strategy is. You will also find examples and solutions to escape this dilemma. In addition, you will learn how the prisoner’s dilemma occurs in companies and businesses.

Table of Contents

What is the Prisoner’s Dilemma?

Prisoner’s Dilemma

A prisoner’s dilemma refers to a game theory thought experiment where two people have to decide whether to work together or be selfish. If they both cooperate, it’s good for both. But if one chooses to be selfish(defects), it’s not good for the other. This shows how being selfish can lead to not-so-good outcomes for everyone.

Imagine two friends who are caught by the police and have to decide whether to tell on each other or keep quiet. They have no way of knowing what the other will do, and they want the shortest punishment. Here are their options:

  • If one remains silent and the other betrays, the one who betrays goes free, and the other gets a big punishment.
  • If both betray each other, they both get some moderate punishment.
  • If they both keep quiet, they both get a smaller punishment for a less serious matter.

It’s like a tricky game where they have to decide what’s best for themselves, but they can’t be sure what the other person will choose.

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Understanding the Strategy of the Prisoner’s Dilemma

In the above scenario, where two prisoners, A and B, try to minimize their years of sentence. There are three possible cases:

  • If both A and B stay quiet (cooperate), they each get only one year in prison.
  • If both A and B tell on each other (defect), they both get two years in prison.
  • Here’s the tricky one: If one tells on the other while the other stays quiet, the one who tells goes free, but the one who stays quiet has to serve three years.

It’s a tough situation because they have to decide if they should trust each other and work together or just think about themselves. It’s like a game where the best outcome depends on their cooperation, but there’s always a temptation to prioritize their interests. This situation is summarized in the table below:

Understanding the Strategy of the Prisoner’s Dilemma

Most Likely Outcomes of a Prisoner’s Dilemma

In the given scenario, achieving Nash equilibrium, where both candidates (A and B) cooperate and receive benefits, seems ideal, the challenge lies in the uncertainty of the other person’s choice. However, it’s important to note that, regardless of the other person’s choice, an individual can benefit more by defecting.

  • If A chooses to cooperate, B’s best strategy is to defect, as getting no punishment is better than getting 3 years of sentence.
  • If A defects, B should also defect, as getting 2 years in prison is better than 3 years. This suggests that defection appears to give better results than cooperation, making it the more likely strategy for both A and B.

Cooperation doesn’t make sense from a self-interested point of view, as there’s no guarantee that the other person will also cooperate. Hence, the inclination is to defect for the chance of higher profit.

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Examples of the Prisoner’s Dilemma

The prisoner’s dilemma can be observed in various real-life situations.

Example 1: During the Cold War, the United States and the Soviet Union were two countries in a competition to build more and better weapons. Both wanted to be safe, so they kept improving their military. But the problem was, the more one side built, the less safe the other side felt. This whole situation is shown in the table given below:

Understanding the Strategy of the Prisoner’s Dilemma

Even though it would have been better for both if they stopped, they both continued to build more and more weapons.

Example 2: Imagine two oil-producing countries that decide to work together by not pumping too much oil, so the prices stay high, and both countries make more money. But here’s the tricky part: each country might think, “If I produce a bit more oil, I can get extra money fast.” Suddenly, both countries are making a lot more oil, and the prices drop. That means less money for both of them. So, there’s a kind of tough situation where they have to find the right balance between working together for the benefit of both and the temptation to make more money quickly. Refer to the following table to understand this scenario:

Examples of the Prisoner's Dilemma

In this case, the ideal solution will be cooperation by both countries.

How to Escape a Prisoner’s Dilemma

Over time, different strategies have been developed to escape the prisoner’s dilemma. These solutions focus on overcoming personal benefits for the common good. 

  • One effective approach includes establishing clear rules and laws and implementing social consequences for betrayals. These strategies convert the prisoner’s dilemmas into outcomes that benefit everyone.
  • Apart from this, individuals and groups have developed psychological and behavioral tendencies, such as a preference for cooperation or defection. These tendencies lead individuals to make choices that may seem “irrational” but are beneficial for everyone involved.

In real-life situations, most interactions happen more than once, unlike the typical one-time scenario in a prisoner’s dilemma. This is known as an “iterated prisoner’s dilemma.” In these repeated interactions, individuals can choose strategies that encourage cooperation or discourage defection over time. By interacting with the same people regularly, we can intentionally turn a one-time dilemma into a series of repeated interactions. The options for success in an iterated prisoner’s dilemma involve:

1. Being Nice: Don’t be selfish before the other person is. Be nice at the start, avoiding selfish moves.

2. Retaliation: Sometimes, the strategy needs to involve retaliating. Choosing not to fight back, or always cooperating, is a bad option that can result in being taken advantage of by more aggressive approaches.

3. Forgiving the opponent: A smart strategy should involve forgiving. Even if there’s retaliation, one should be ready to cooperate again if the opponent stops betraying. This avoids long cycles of revenge, making the most of the situation.

4. Prioritizing Collaboration Over Competition: Don’t aim to beat the other person all the time. Avoid too much competition and focus on working together.

In a nutshell, the iterated prisoner’s dilemma’s optimal strategy depends on the likely opponents’ strategies and how they respond to cooperation and defection.

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Prisoner’s Dilemma in Business and the Economy

Prisoner’s Dilemma in Business and the Economy

The prisoner’s dilemma occurs in many areas of business and the economy. In business, this situation occurs when two rival companies compete in the market. Some real-life examples of such companies are Bharti Airtel and Reliance Jio Telecoms, PepsiCo and Coca-Cola, and Starbucks and Tim Hortons.

Now consider the example of Bharti Airtel versus Reliance Jio Telecoms. If Reliance Jio Telecoms decides to cut the price of one of its mobile plans, Bharti Airtel may be forced to do the same to protect its market share. However, this simultaneous price cut could lead to a decline in profits for both companies. In this context, the price cut by one company could be seen as a violation of a tacit agreement between the two rivals to maintain higher prices to maximize each other’s profits. If Reliance Jio opts for a price cut while Bharti Airtel maintains its higher prices, the former will be seen as defection while the latter will be seen as cooperation. This smart move could help Reliance Jio grab more customers, making more money from selling recharge plans.

If this situation continues, it can cause investors to lose faith in the telecommunications industry. Therefore, stock prices may be impacted, and the general level of economic uncertainty may increase. In simple terms, in a competitive market, the decisions made by individual businesses impact the entire economy in addition to their financial results.

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The prisoner’s dilemma is a valuable tool for understanding how people make decisions in different areas. It makes us question our ideas about making smart choices and helps us see the tricky balance between what’s good for one person and what’s good for everyone. As we deal with the complicated ways people act and the problems our society faces, the lessons from the prisoner’s dilemma still matter. They show us that trust, talking to each other, and working together are crucial for making things better for everyone.

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About the Author

Senior Research Analyst

As a Senior Research Analyst, Arya Karn brings expertise in crafting compelling technical content in Data Science and Machine Learning. With extensive knowledge in AI/ML, NLP, DBMS, and Generative AI, his works get lakhs of views across social platforms that benefit both technical and business spheres.