Game: The Prisoner's Dilemma

The Prisoner's Dilemma

Image Credit: http://www.environmentalgraffiti.com/people/news-are-humans-selfish-concept-homo-economicus

As you can see from the above comic, when two parties make decisions independent from one another, it doesn't always work out well. In this case, we have the community suffering through a stock market crash. One community member decides that he's had enough and will start spending again (with the thought that if he decides to do it, others will follow suit). 

Option 1: If "Guy" spends and the "Community" spends, it will be a the best case scenario since it will bolster the economy.

Option 2: If Guy spends and Community doesn't, Guy will lose much more and the Community won't lose what they still have, even if they do not gain from it.

As you can guess from the 4th panel, option 2 has occurred!

I really like the way the article's author Orco describes the Prisoner's Dilemma:

"Are humans evolutionally constructed to be ultimately self-interested, or might there be more complex systems acting behind this rather simplified idea and if so, why do we continue to talk about the idea of 'homo economicus'?"

Source: How Game Theory Economics Explain Human Altruism

Brief Explanation - Prisoner's Dilemma in Game Theory

Two people commit a crime together and get caught as they are leaving the scene. Unfortunately, there is not enough evidence to convict the perpetrators. As a result, they are separately taken in for questioning with the following deal that police give them:

If both testify against each other, they will receive a sentence of 1 year in prison.

If one rats on the other while the other stays quiet, the "defector" or rat will get off scott free while the other criminal will serve a 5-year sentence.

If both criminals do not rat each other out and stay quiet, then both will go to jail for 3 years.

You can probably see the conundrum here where it would be difficult to decide what the other criminal, or player might do. Will the first criminal act rationally and try for getting only 1 year in jail, expecting the other to do the same? Or will the 1st criminal decide to try for a 0-year sentence by ratting the other out? (And if they do, will they end up ratting each other out and therefore both getting 3 years in prison?)

Orco describes also this as a test of "human altruism."