The paradox of the prisoner’s dilemma used in game theory shows that win-win situations are always best. But can this insight be applied in practice? Isn’t it precisely the courage to do things differently that triggers innovation? What is the right balance between conflict and cooperation and can the key value of trust help us to break out of this dilemma?
During the Economic Symposium, I attended the very fascinating breakout session “Jailhouse rocks? Or wouldn’t it be better to break out of the prisoner’s dilemma altogether?”. In the course of the session, we played a game to test cooperation and trust. The game was played by groups of three people, representing player A, player B and a neutral observer. To each of the players were given 2 coins out of a coins bag with a total of 10 coins. To start with the game, four options were available to the players:
1) A throws one coin into the bag, B does not – A loses, B gets the coin. The good faith of A gets abused.
2) A and B throw one coin into the bag – Both players win and get two coins back each, which reflects cooperation.
3) B throws one coin into the bag, B does not – B loses, A gets the coin. The good faith of B gets abused.
4) Nobody throws a coin into the bag – Nobody wins any coins, which reflects no cooperation at all.
The two players acted independently and did not know about the actions of their counterparts. The observer collected the coins in the bag and after each round had to distribute the earned coins to the players. The goal was to maximize coins until no coins were available in the bag. The win-win situation consequently would be reflected in both players ending-up with five coins each. This result was also obtained by my colleague Aloysius and me.
However, extreme results turned out to be achieved in the audience. People were winning with seven against three coins. „I tried to convince my counterpart with cooperation, and I did it several times until I ended-up losing coins again and again “, was the explanation of a lady in the audience, who lost the game. According to Ernst Fehr (one of the most influential European economists, Professor at University of Zurich and candidate for the Nobel Prize in Economic Sciences), the more rounds you play, the more cooperation decreases. His results were replicable in similar experiments all over the world.
Does this mean that good faith gets punished all over the place?
No. In many countries another feature was added in order to change the rules of the game, and seems to reflect how people tend to behave in behavioral economics. Namely, people were given the right to punish their counterparts in case cooperation did not work properly (punishments of a few coins). This way the results turned out to change dramatically, up to full cooperation between the players. Good faith consequently, when it is allowed to punish counterparts, who try to abuse cooperation, tends usually to lead into win-win situations.
So, do we need punishment to foster cooperation?
Probably, yes. History shows us that for instance for many trade agreements this might have an impact. Nevertheless, we have seen also negative examples. To mention one, the sanctions for Russia in the Crimea affair do not seem to achieve the desired impact yet. This may be rooted in the differences of cultures according to Hofstede’s cultural dimensions as Professor Fehr predicts.
Finally, we can ask ourselves whether the Paris agreement will end in a win-win situation (as there are no sanctions included)?
Time will show…