By: Khanh Le
While economics is ubiquitous with get-rich-quick schemes involving stocks, trading, and other financial tools (especially at as high-caliber of an institution as Harvard), it is also home to many theories and laws that reflect human nature. One such area is game theory. Used by many firms as part of competitive strategies, game theory still applies to everyday situations. It is a simple yet powerful tool to explain events where a conflict of interests exists. Prisoner’s Dilemma, one of the most popular outcomes of game theory, describes a situation where it is to the players (or individuals in the game)’ best interest to not cooperate and take the worst courses of actions. It is totally fair to apply the Prisoner's Dilemma to even the simplest event: turning in assignments in class. Figure 1 shows a grid of the decisions and their consequences and will be explained in much greater details. Through this fun, easy exercise, readers can see an application of economics to everyday life.
Mathematician John von Neumann and economist Oskar Morgenstern pioneered game theory in the 1940s. In the arms race in January of 1950, Melvin Dresher and Merrill Flood did an experiment that introduced the now famous Prisoner’s Dilemma. In modern times, it has become “a universal concept that has practical applications to biology, psychology, sociology, economics, law, and other disciplines.” It is often regarded as “one of the great ideas of the twentieth century, simple enough for anyone to grasp and of fundamental importance.”
Here is the quick breakdown: when caught, two convicts A and B must decide between two options: to confess and to stay silent. Granted, the core assumptions are that the two players are both rational, utility-maximizing people without any planned communications, which might be hard to come by in this day and age. When both confess, they will both receive 3 years in prison. When only one confesses, that convict will only receive 1 year while the other convict will receive the longest sentence of 6 years. If both stay silent, they will both face 2 years. Those are the general rules, and there are certainly adjustments that fine tune the game. Through risk assessment, both convicts will want to confess, which might not be the best decision for any individually.
Now, let us say that A and B are the top two students in the class who are applying to grad school and need a stellar letter of recommendation from the professor. The rest of the class does not have the same stake and thus any involvement in this game. Students are tasked with writing a paper that the professor will meticulously critique. Here, A and B have the option of writing a magnificent paper while sacrificing their valuable time or to use their time on something else. In the same vein as the Prisoner’s Dilemma, if both write the essay to the best of their abilities, they will receive good grades, sure, but none will get a special recognition. In fact, they will both waste valuable time writing those papers. If only one writes enthusiastically, that student will get special recognition while the other will simply just get good grades. If neither writes diligently, they will simply get the same amount of recognition but more time spent elsewhere. Figure 2 clarifies the actions and outcomes for each student.
Not to discourage students from going all out and perfecting their academic pursuits, but the game shows that they should avoid petty competition in class as there is always a better use of their time. Now, readers can adapt the framework to their own unique versions and circumstances and find their own result. Changing any of the perimeters should change the outcome dramatically. Who is to discourage you? Through this fun exercise, it is clear that a bit of thinking and logic in an economics mindset go a long way to resolve daily situations.
