Prisoner's Dilemma: The Best Strategy Is To Be A Prick

The Prisoner’s dilemma is the best-known game of strategy in social science. It is the relationship between cooperation and competition in business, relationships, and politics. In the traditional game, the police have arrested two suspects and are interrogating them in separate rooms. Each can confess or keep silent. Confession is the dominant strategy, as it implicates the other and helps avoid a harsh sentence. But when both confess, the outcome is worse than if both kept silent.

Take it in the context of business. Reckon we are analyzing two firms: Sprite and Fanta. They sell similar goods: soft drinks. Each has to decide on a pricing strategy. If they both charge a relatively high price, they exploit their joint market power: the customer has no choice but to pay. Whereas if one sets a competitive low price and wins customers from the rival, the competitor might respond with the same action. Now instead of both making 20 million dollars, each makes 15, and the only benefactor is the one drinking the soda for a friendlier price tag. The low-price strategy equates to the prisoner’s confession. One confession, or one rival stealing customers due to their lower prices, is the optimal strategy. But when they begin competing, the result is worse for both than if they had cooperated.

The idea is simple. If both prisoners stay silent—cooperation—they each serve a year. When one of them testifies—competition—they are freed but the second prisoner serves 3 years. And if both of them testify, they are sentenced to 2 years. So the stratagem is to be imprisoned with a buddy where you both stay silent. That’s a joke. The strategy with the highest probability for you to win is to testify and bet on getting yourself freed. The collectively ideal result of mutual cooperation won’t happen since humans are innately self-interested. And if both of you hold the same stance, it’s still better than staying silent and being thrown under the bus: 2 years instead of 3.

Once you understand the principle of cooperation and competition you start seeing it everywhere. The so-called Nash equilibrium is naturally achieved because cooperation is typically not in the interests of society as a whole. An instance of this is keeping prices high as businesses. It does not work since the cost to consumers is higher than the increased profit of the firms. Thus companies that operate on their self-interest by competing via pricing help the rest of society and come out on top.

Real-world instances of the Prisoner’s dilemma:

• Business: two competing companies might choose to engage in pricing wars. The aim is to gain market share. The result is often lowered profits for both. Alternatively, by tacitly agreeing to maintain stable pricing—cooperation—both can garner higher profit margins;

• Public goods and entertainment: when multiple parties have access to a shared resource, when each exploits it for personal gain, the resource depletes. We call this the tragedy of the commons. On the other hand, cooperating to make best use of the resource is what drives sustainability;

• Team dynamics: in the workplace, if every team member focused solely on individual recognition—competition—overall team performance might suffocate. However, a culture of collaboration and cooperation would result in a global optimum and more collective achievement.

How you might use the Prisoner’s dilemma as a mental model: (1) recognize mutual dependency, the relationship that reminds you of the interaction between your outcomes and not only your choices, but the choices of others; (2) encourage communication and trust where applicable, as turning one-shot dilemmas into repeat, positive interactions will promote cooperation and incentivize both parties for more benefit; (3) structure the situation in a way that cooperation is rewarded and competition is penalized to shift the balance towards mutual benefit, like by designing bonus systems or profit-sharing plans as a business to encourage employees to work together rather than in rivalry; (4) consider the long-term, second-order consequences, since the short-term gains of competition are often trumped by long-term losses.

Understanding this framework helps you grasp situations where communication and trust are essential. Cooperative behavior results in better outcomes for all the parties involved. Most of the time. At the same time, humans are irrational creatures. The best strategy? Be selfish. Why? Because the prisoner on the other side is likely a selfish prick as well. In a perfect world however, you both stay silent and serve shorter sentences.