How a very simple concept in game theory – the Prisoner’s Dilemma – is omnipresent in our economic lives and in almost all social interactions, and the tension between individual incentives and societal good.
The Prisoner’s Dilemma is a construct in game theory that shows why two completely rational individuals might not cooperate, even if it appears that it is in their best interests to do so. It speaks to the natural tension between individual and group decisions. Once you learn about the Prisoner’s Dilemma, you can’t stop seeing it everywhere. It explains why people have an incentive to cheat on their taxes, dope in sports, hoard toilet paper, own guns, or restrict more residential housing in their community.
Even though capitalism is set up so that we collectively generate the most wealth by each of us acting in our own interest, the Prisoner’s Dilemma highlights circumstances where we often collectively generate sub-optimal outcomes.
There are only two ways to manage the Prisoner’s Dilemma: to create a situation where all of the relevant players can communicate and completely trust one another, or have some entity (often a government one) mandate certain behavior to prevent “free riders” or to otherwise ensure the more optimal decision – economically or otherwise – is reached by each player.
More recently, we’ve witnessed the Prisoner’s Dilemma on display as it relates to COVID-19 restrictions and vaccines. Despite the irony that COVID vaccines have minimal cost (financial or otherwise) to an individual, the (perhaps tautological) perception by some that getting a vaccine isn’t in their individual interest has shown to create deadly consequences for us collectively.
The Prisoner’s Dilemma can also tamp down on innovation, as often individual economic actors have reduced incentives to improve for fear of the relative disadvantage it can place them in versus competitors (e.g., higher costs from building a more efficient car).
Just like all primates, humans have succeeded both because of individual competition to adapt and survive along with the emphasis on social cooperation and support. As for economics, the free market is a great starting framework for allocating economic resources among an incredibly diverse group of producers and consumers, but it cultivates better outcomes for all when it takes into account the obvious connections among these economic players.
Key Terms Used
Boiling Frog, Externality, Free Rider, Frequency Illusion, NIMBYism, Prisoner’s Dilemma, Public Good, Rational Decisions, Self-Fulfilling Prophecy