What is Prisoner’s dilemma?
The prisoner’s dilemma is a game theory scenario in which two rational individuals acting in their own self-interest each produce an outcome worse than if they had cooperated. It is the foundational model for understanding why cooperation is difficult even when it is mutually beneficial.
How it works
Two suspects are arrested and interrogated separately. If both stay silent, they each get one year. If one betrays the other, the betrayer goes free and the silent one gets ten years. If both betray, both get five years. The rational choice for each individual is to betray, but mutual betrayal produces a worse outcome than mutual silence. This paradox extends to arms races, price wars, climate negotiations, and any situation where short-term individual incentives conflict with collective welfare.
Applied example
Two competing gas stations on the same corner each have an incentive to undercut the other’s price, but the price war leaves both with razor-thin margins. If they could credibly commit to maintaining prices, both would profit more.
Why it matters
The prisoner’s dilemma explains why trust, reputation, repeated interactions, and enforceable agreements are essential for cooperation, and why one-shot anonymous transactions are most vulnerable to defection.
