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Economic Term ‘A Prisoner’s Dilemma

06 Jun

A paradox in decision analysis in which two individuals acting in their own best  interest pursue a course of action that does not result in the ideal outcome.  The typical prisoner’s dilemma is set up in such a way that both parties choose  to protect themselves at the expense of the other participant. As a result of  following a purely logical thought process to help oneself, both participants  find themselves in a worse state than if they had cooperated with each other in  the decision-making process.

An example of a Prisoner Dilemma;

Suppose two friends, Ally and Baker are suspected of committing a crime and are  being interrogated in separate rooms. Both individuals want to minimize their  jail sentence. Both of them face the same scenario: Ally has the option of  pleading guilty or not guilty. If he pleads not guilty, Baker can plead not  guilty and get a two-year sentence, or he can plead guilty and get a one-year  sentence. It is in Baker’s best interest to plead guilty if Ally pleads not  guilty. If Ally pleads guilty, Baker can plead not guilty and receive a  five-year sentence. Otherwise he can plead guilty and get a three-year sentence.  It is in Baker’s best interest to plead guilty if Ally pleads guilty. Ally faces  the same decision matrix and follows the same logic as Baker. As a result, both  parties plead guilty and spend three years in jail although through cooperation  they could have served only two. A true prisoner’s dilemma is typically “played”  only once; otherwise it is classified as an iterated prisoner’s dilemma.

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