The Prisoner’s Dilemma is one of the most famous instances of a game theory thought experiment. The Dilemma is best described as a test of trust: if both players trust each other, the rewards are the greatest. If one betrays the other, the betrayer gains the most and the other loses the most. If neither trusts each other, they both lose out.
The basic premise of the Dilemma involves two “prisoners” (the game’s participants), who are being interrogated and must either confess to the “prison guard” (a neutral player who serves as the host of the game) or defect. If both players defect, they both receive a short prison sentence, the most ideal situation for both players. If one player confesses and the other defects, the defecting player receives no sentence while the confessing player receives a long sentence, the best outcome for one player while the worst for the other. If both players confess, they both receive a medium sentence, the worst joint outcome.
Not everyone has been in prison, so here is a better example: You and your friend want to jump into the lake at the same time. If you both jump, you will have the greatest total amount of fun. However, if one jumps while the other does not, the friend who doesn’t jump gets to stay dry and laugh at the one who jumped. If neither jump, both walk away with the smallest reward, feeling dissatisfied. In this case, “jumping” is equivalent to “confessing,” while “hesitating” is equivalent to “defecting.”
Either “player” of this “game” has the option to risk getting more reward out of a scenario, but if the other player has the same idea, they both might end up worse off than if they both had trusted each other.
The Prisoner’s Dilemma is famous for a reason. It provides many aspects of game theory that are easy to study and observe. Both psychology and sociology come into play: to predict what option someone will pick, you must evaluate his personality and the social situation. If someone is more aggressive, he might defect earlier and more often. In addition, the person who he is playing against might influence his level of trust, and therefore his decision- this goes great lengths to explain how we interact with other people. In addition, many game theory concepts are involved in the Dilemma, including the Nash equilibrium. Both players defecting is an equilibrium, as switching to cooperation does not benefit either one, unless the other switches.
Perhaps more important, the Prisoner’s Dilemma is relevant in the field of game theory because of how often it appears in the real world.
Coca-Cola and Pepsi both offer similar products. If they both keep the same prices, they both make a decent amount of money. If one makes its soda cheaper, it will persuade more customers to switch over and make that company more money, and the other less. If they both lower their prices, no customers will switch over and they will both make less money than if they had both kept the same prices.
Deciding whether to change the price of a product or not in competitive situations is a practical example of the Prisoner’s Dilemma, and therefore game theory.