Economics is all about making choices.<\/p>\n
Usually, the tendency is to think of economics as being about unemployment, and inflation rates, and the stock market.\u00a0 But these things are a reflection of the choices we make about who provides what products and services, and how much of each should be made available, and who gets to consume them.<\/p>\n
As individuals and as a society, we are constantly making choices because we are limited in what we can do.\u00a0 There are only so many hours in a day, only so many skills that can be learned, only so many experiences to be sampled.\u00a0 So, at its core, economics is the science of making choices.<\/p>\n
An increasingly fertile approach to understanding how people make choices and what optimal choices can be made is found in the study of game theory.\u00a0 And one of the more interesting and deceptively complex games is the Prisoner\u2019s Dilemma<\/a>.<\/p>\n Introduced by Merrill Flood and Melvin Dresher in 1950, with polish and the name added by Albert Tucker in the same year, the Prisoner\u2019s Dilemma (PD) is an example of a game where an individual making choices based on his own rational best-interest may actually hurt himself in the long run.<\/p>\n The narrative behind the game is usually quite simple and a little dull, so what I present here has been dramatized a bit to add flavor.\u00a0 It is based on the introduction to the PD found in Principles of Economics: Economics and the Economy, Version 2.0<\/em> by Timothy Taylor.<\/p>\n Two known felons, call them Al and Bob, have just knocked over a liquor store and have made off with $5000.\u00a0 They jump in their old beater of a car and rush from the scene of the crime.\u00a0 As they barrel down the city streets they run a red light, smash into the back of car, and flee on foot with the money.\u00a0 Owing to their bad luck, a police prowl car was nearby and the officers begin to chase them.\u00a0 Al and Bob duck into an alley where they toss the money in a sewer drain minutes before they are apprehended by the cops.\u00a0 As the police are charging these two with hit-and-run and reading them their Miranda rights, the radio starts blasting out an APB describing two men wanted in the liquor store hold-up.\u00a0 Since Al and Bob match the description, the officers haul them to the police station where each is held separately until they can appear in a line-up.\u00a0 Unfortunately, the store owner is unable to positively identify either of them and, hoping to loosen their tongues so that they would confess, the police try the following tactic.<\/p>\n Keeping Al and Bob in separate rooms, unable to communicate with each other, the police send in one of their toughest cops, Detective Taylor.\u00a0 Taylor confronts Al first and lets him know that the police have him dead-to-rights on the liquor store caper and on the hit-and-run and that, all told, Al is facing 8 years of hard time.\u00a0 Al spits back that all the police have on him is the hit-and-run and he can do the 2-year stint in the county jail (seems Al has been down this road before, if you\u2019ll forgive the pun).\u00a0 Smiling, Taylor tells Al that Bob is making a deal and, in return for him naming Al as the mastermind behind the robbery, Bob\u2019s going to get out in 1 year while Al does the full 8-years.\u00a0 Taylor urges Al to not be a sap and to confess.\u00a0 He tells Al that if he owns up to his crime and implicates Bob as his accomplice, the DA will cut his prison time and send both him and Bob to jail for 5 years.\u00a0 Taylor says he\u2019ll give Al twenty minutes to think it over and he leaves the room, ostensibly to let Al sweat but really to make the same speech to Bob.<\/p>\n Having been in and out of police stations, court rooms and jails most of his adult life, Al recognizes that the only hard evidence the police have is that Al and Bob were involved in a hit-and-run.\u00a0 The police are probably not even sure who was driving.\u00a0 So if he keeps his mouth shut they can\u2019t touch him on the liquor store robbery.\u00a0 However, he also recognizes that if Bob bites on the deal, there will be enough evidence to convict him of both crimes.\u00a0 He also knows that Bob is reasoning the same way.<\/p>\n Okay, what should Al or Bob do?\u00a0 They choices are summarized in the following table.<\/p>\n Clearly, if Al is looking out for his own interests, then the best deal he can make is if he betrays his partner, confesses his involvement, and Bob stays quiet, through either a sense of loyalty or a gamble that Al is staying quiet too.\u00a0 However, Bob will be pursuing his own interests and he is also likely to confess, betraying Al in the same fashion.<\/p>\n Here is the Prisoner\u2019s Dilemma in all its glory.\u00a0 It is an example of a social dilemma where one-sided betrayal gives the best results for the betrayer but in which cooperation gives the best results for the group as a whole (cooperation gives 4 years total compared with 9 and 10 years for the one-sided and two-sided betrayal scenarios, respectively).<\/p>\n Of course, the story of Al and Bob is contrived, but it contains key elements of real social dilemmas that affect us all.\u00a0 And, in fact, the PD has been widely studied and applied in diverse areas such as biology, psychology, sports, and diplomacy.\u00a0 Any situation where the payoff for cooperation is less than the payoff for one-side betrayal usually presents this situation.\u00a0 Mathematically, this amounts to any situation where the table above can be translated into<\/p>\n where \u00a0the largest payoff \u00a0(L) > cooperative payoff (C) > mutually-betrayed payoff (M) > sap payoff (S).<\/p>\n One real world example of this is the OPEC oil cartel.\u00a0 Each member of the cartel has entered into an agreement with the others to hold production to a particular quota so that each can reap sizable profits.\u00a0 Each nation also knows that, without warning, one member could either raise production or lower price to boost its earnings \u2013 thus betraying the others.\u00a0 Also, each nation knows that, if two or more of them engage in this behavior, then they all suffer.\u00a0 Each of us is involved in this game, since oil prices affect prices for all the goods and services we consume.<\/p>\n Another, and perhaps more important, example of the Prisoner\u2019s Dilemma is the situation of the Free Rider problem discussed last week in the context of the Plymouth Colony.\u00a0 As a citizen in Plymouth Colony, my cooperative payoff (C) is an ample ration of food that the Colony provides, which is made up of some of the food I diligently grew on my farm along with some of the food my neighbors also diligently grew on theirs.\u00a0 My sap payoff (S) is a smaller ration of food that results when some of my neighbors shirk their responsibility and grow little or no food and my contribution has to be stretched over more mouths. My largest payoff (L) is a ration of the same size as I got for (S) but this time, since I am the one who grew nothing, I am effectively getting free food.\u00a0 Since I didn\u2019t have to work for it and, indeed, I may not be working at all, I can eat well on the smaller ration as long as other people are the saps. Finally, my mutual-betrayal payoff (M) is a tiny ration, not enough for me to avoid chronic hunger.\u00a0 It results from most or all of the Plymouth citizens basically betraying each other.<\/p>\n During the years 1621-22, the Plymouth Colony actually engaged (without knowing it explicitly) in a real life Prisoner\u2019s Dilemma with real life consequences.\u00a0 Many of them died and all went at least a year and a half barely surviving.\u00a0 They resolved the Prisoner\u2019s Dilemma by eliminating the cooperate box and making all property private.\u00a0 This eliminated the Free Rider problem and resulted in a bountiful feast in the autumn of 1623.<\/p>\n","protected":false},"excerpt":{"rendered":" Economics is all about making choices. Usually, the tendency is to think of economics as being about unemployment, and inflation rates, and the stock market.\u00a0 But these things are a... 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\n <\/th>\n Bob<\/th>\n<\/tr>\n \n Remain Silent<\/td>\n Confess<\/td>\n<\/tr>\n \n Al<\/strong><\/td>\n Remain Silent<\/td>\n 2 years for Al
\n2 years for Bob<\/td>\n8 years for Al
\n1 year for Bob<\/td>\n<\/tr>\n\n Confess<\/td>\n 1 year for Al
\n8 year for Bob<\/td>\n5 years for Al
\n5 years for Bob<\/td>\n<\/tr>\n<\/tbody>\n<\/table>\n\n\n
\n <\/th>\n B<\/th>\n<\/tr>\n \n Cooperate<\/td>\n Betray<\/td>\n<\/tr>\n \n A<\/strong><\/td>\n Cooperate<\/td>\n C for A
\nC for B<\/td>\nS for A
\nL for B<\/td>\n<\/tr>\n\n Betray<\/td>\n L for A
\nS for B<\/td>\nM for A
\nM for B<\/td>\n<\/tr>\n<\/tbody>\n<\/table>\n