Prisoner’s Dilemma is one of the most popular Game Theory showing two completely rational decision-makers may choose the strategy that produces less than optimal outcome. According to Operations Research: Applications and Algorithms (Winston,1987), this is the setting for Prisoner’s Dilemma: Two guilty criminals are captured by the police department and waiting for their trial.
However, the district attorney is unsure he has enough evidence to convict them. To entice them to testify against each other, the district attorney makes an offer to each prisoner: “If only one of you confesses and testifies against your partner, the person who confesses will go free while the person who does not confess will surely be convicted and given a 20-year jail sentence. If both of you confess, then you will both be convicted and sent to prison for 5 years.
Finally, if neither of you confesses, I can convict you both of a misdemeanor and you will each get 1 year in prison.” Based on this case, the reward matrix is the following.
The prisoners are unable to communicate with each other, and each prisoner has an incentive to confess, regardless of the other prisoner's choice. From one prisoner perspective’s the risk of choosing ‘don’t confess’ is higher than confessing since it is either 1 year in prison or 20 years in prison and this works for both prisoners.
This shows the important features of the Prisoner’s Dilemma which is the best outcome for each individual is different than the best outcome for society (when every individual cooperates). One common problem of Prisoner’s Dilemma is a tragedy of the commons. It is an economic problem where each individual has an incentive to consume resources with the expenses of other individuals.
Another Prisoner’s dilemma example in real life includes the decision between two rival companies to invest on Marketing Campaign for generating sales. If both do the same strategy, then both companies would not gain any competitive advantage. However, if only one does the strategy, then the other firm would greatly generate more profits.
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