Part-I: Applying the Prisoner's Dilemna to real life...

I read an article recently that talked about how Game Theory, a neoclassical micro-economics concept, could be applied to a whole range of human scenarios & subjects, including political science, evolutionary theory and artificial intelligence.

Game Theory of course, talks about how economic agents behave when the respective benefits and costs of their different actions depend upon the choices of other parties. It is quite often applied in oligopolistic markets, where each party faces a few strong competitors.

Rather than delving into the depths of Game Theory (of which I assure you, I know very little!), let me focus on the now-famous 'Prisoner's dilemna', the applicability of which particularly struck me. Now, elaborating on the essense of the Prisoner's dilemna in the written form of the English language is a task that even Prof. Pushan DUTT would cringe at. So let me illustrate the concept with a well-known scenario.

Jack and Jill commit a burglary and are arrested. They are taken to separate rooms and interrogated. Neither knows what the other is saying. If both Jack and Jill stay silent, they will both serve a 1-year jail sentence. If Jack stays silent however, and Jill confesses, Jack gets a 10-year sentence while Jill gets freed for her cooperation. Jack knows this and reasons that Jill will most likely think only about herself. Hence, it is certain that she will confess. Jack decides to confess as well and with Jill confessing too, both get 5-year jail senternces. The scenario is illustrated in the figure.


In the scenario, Jack has to keep in mind all available options to Jill since the the result of his actions are influence by Jill's actions. In this, it is clear that both parties have no option but to confess and hence, a collective equilibrium (Nash Equilibrium in economics parlance) scenario is for BOTH to confess.

This result is called the "Prisoner's Dilemna" because the final result is clearly sub-optimal! If both parties colluded and stayed silent, they would both get off with just a 1-year sentence!

There are infinite business examples where this game is commonly played out. Lets say Colgate and Crest have roughly equal market share of toothpaste sales in a given region. A tube costs $4 to produce and sells for $10, thereby reaping earnings of $6. As sales begin to stagnate, both parties get anxious. Ideally, they should BOTH stick to the current sales price. However, the fear of Crest slashing prices forces Colgate to slash its price to say $7, thereby reducing profits by 50%. Crest of course, does the same and now both parites record earnings of only $3 per tube. This is clearly sub-optimal, compared to the earlier $6 earnings, but in a sense, neither party has any other option. This is indeed, the Nash Equilibrium.

And herein lies the crux of the issue...where strict economics meets social and human behavioral patterns head-on.

"People are strictly selfish...(and) will seek to maximize their returns with little or no consideration to other parties, save for family". Famous words by Richard Dawkins in his popular, controversial book 'The Selfish Gene'.

Makes for dismissive reading if you're an optimist. But how applicable is the concept when rationalizing people's everyday behavior? And if true, why do most people continue to act selfishly when it clearly undermines the collective good?

On July 25, 2007, Ms. Pratibha Patil was sworn in as the first woman president of the republic of India (13th overall). In my follow-up post, I'll look into how the process epitomized a Prisoner's dilemna and how we continue, time-after-time, to fall into this trap. Till then...