There was once a burglary at a large jewelry store. Over 20 million dollars’ worth of jewelry was stolen by the burglars. Two key suspects, Roy and Tim were arrested for the crime by the local police and brought to the station for interrogation. Take note that the authorities have no solid evidence or witnesses that could be used to convict them. The only way that they can get a conviction is by getting them to confess.
For 3 days, they tried to get a confession from them to no avail. The police captain then decides to hand over the case to the CIA for enhanced interrogation techniques within the boundaries of the law.
The CIA interrogators have a plan. They put these two suspects in separate rooms in which no communication is possible. To each of them they offered the same deal which goes thus:
"If you confess and implicate your partner, you go free, but if you stay quiet and your partner confesses, that's 10 years of prison time for you and he goes free. If you both confess then because you cooperated, you both get 5 years. If you both stay quiet, then you will just get minor charges, that's 1 year prison time. The choice is yours to make"
What should these burglars do to get the minimum prison time. If you were one of them, what will you do to minimize your sentence as much as possible?
This seems quite complex, but let's break it down. Basically, there are four possibilities that we can see from the deal. Both Roy and Tim could each either cooperate or stay quiet.
1: They both stay quiet
2: Tim confesses but Roy remains quiet.
3: Roy confesses but Tim remains quiet
4. They both confess
If they both remain quiet, they will get 1 year each. However, this is close to impossible first because they can't communicate. They're being subject to enhanced interrogation from expert CIA interrogators with all sorts of psychological tricks involved. It's very possible for any of them to break. Tim for instance knowing that Roy has been given the option to confess and go free will not want to face the possibility of getting the maximum sentence of 10 years. So, to avoid that his best bet is to confess. In that case, either one of the two could happen: Roy also confesses and they both get 5 years or Roy stays quiet and he (Tim) goes free and Roy gets 10 years. Therefore, Tim in confessing, either way gets something better than 10 years in prison.
For the same reason, Roy also will rather choose to confess. So, the most likely outcome is that they both confess. If you were one of them, you'll also be better off confessing rather than staying quiet.
What do you think? Is there a better strategy they could use? Let us know in the comments. This is a good example of a phenomenon in decision analysis known as The Prisoner's Dilemma.
What is the Prisoner’s Dilemma?
It's a paradox in which two individuals who acting in their own self-interests make a decision which produces an outcome that isn't optimal. It was invented over 3 decades ago by two scientists at Rand Cooperation. There are real world examples of this phenomenon which could have positive or negative impacts.
According to the New York Times, the prisoner’s dilemma has become a main model for most psychologists, biologists, political scientists and economists to try to get an understanding of the dynamics of cooperation and competition. It shows that cooperation could also arise from a combining restraint and retaliation. It’s a classic illustration of the an “eye-for-an-eye” rule.
There have been other experiments with variants of the classic prisoner’s paradox. One of them, the iterated prisoner’s dilemma in which subjects play many times instead of once brings out the real power of the prisoner’s dilemma. The best course is for opponents to cooperate over the long run but they also have the overwhelming temptation to betray the other. They discovered that the best strategy is “Tit-for-tat”, that is doing unto your opponent what he has done unto you. If your opponent cooperates then you cooperate, if he betrays you then you betray him in return. This method produced the best results than those that always betrayed or betrayed at random.
Applications in Business
A very good example of the prisoner’s dilemma in the real world is the stiff competition between two key players in certain industries in the marketplace. We have the likes of Coca-Cola and Pepsi in the soft drinks space, Lowe’s versus Home Depot with building supplies, Apple and Samsung in the smartphones space, or Microsoft (Windows) and Apple (MacOS) in the Operating systems space, and there are other examples.
These rivals spend time trying to predict how the other will act and also act accordingly. That’s what has rapidly accelerated the release of several Apple iPhones and Samsung Galaxies most at times with competitive features. When Apple releases the iPhone 12 Max Pro with a 12MP camera system (Wide angle, ultra wide, and telephoto), Samsung releases the Galaxy S21 with a camera system consisting of a 64MP telephoto and 12MP (wide angle and ultra wide) cameras. The competition is stiff.
What if Coca-Cola decides to cut down the prize of coke. Doing so will draw more customers to them. Pepsi will also be forced to cut down it’s prize to remain competitive so as not to lose it’s customers. The price drop is not the most optimal solution, but they do it out of necessity to maintain their market share. Businesses are out to maximize profit so a price cut can be seen as one company defecting and violating the agreement to keep prices high to maximize profit. If Pepsi chooses to keep their price, they may end of up losing market share to Coca-Cola so they also follow suit. Just like the case of Roy and Tim. That right there is the prisoner’s dilemma.
How can you apply the Prisoner’s dilemma in your life?
You can use it to make decisions concerning certain aspects of your life such as salary negotiations, buying a car or a house and more.
Let’s assume you want to purchase a car. You walk into a car dealership. Your objective is to get the best deal possible, that is minimum cost with best features. The salesman wants to sell it at the highest possible price to maximize profits. What happens then?
You could cooperate; meaning you walk in and just pay the exact asking price without bargaining thus pleasing the salesman. Or you could bargain to get a lower price and a higher satisfaction compared to the salesman. To analyze this further let’s assign a value to the level of satisfaction from 0 (lowest) to 10(maximum). There are four possible scenarios as we saw earlier which are summarized in the table below:
What this matrix shows is that if you bargain extensively then you’ll get a low prize and full satisfaction(b) but the Salesman will not be satisfied. However, if the Salesman doesn’t want to reduce the price at all then he will be satisfied while you’ll walk away unsatisfied(c).
If you just paid without bargaining, you may not the fully satisfied because of the thought that maybe you could've gotten it at a lower price had you bargained. The salesman will likely not also be fully satisfied. Since you were willing to pay the full price, he would be left wondering whether he couldn’t have asked for much more than what he asked(a).
Cell (d) shows a case of extensive bargaining from both you and the salesman which could eventually lead to each of you compromising thus a much lower satisfaction on both ends.
Conclusion
The prisoner’s dilemma shows us that cooperation isn’t always the best strategy. When shopping for expensive items such as cars, houses, machinery and more, bargaining is your best course of action. Sellers could decide to be inflexible with prices but that will reduce client satisfaction and possibly cause clients to go elsewhere. So, sellers are better off also playing the bargaining game.