Prisoner's Dilemma

AAA

DEFINITION of 'Prisoner's Dilemma'

A paradox in decision analysis in which two individuals acting in their own best interest pursue a course of action that does not result in the ideal outcome. The typical prisoner's dilemma is set up in such a way that both parties choose to protect themselves at the expense of the other participant. As a result of following a purely logical thought process to help oneself, both participants find themselves in a worse state than if they had cooperated with each other in the decision-making process.

INVESTOPEDIA EXPLAINS 'Prisoner's Dilemma'

Suppose two friends, Dave and Henry, are suspected of committing a crime and are being interrogated in separate rooms. Both individuals want to minimize their jail sentence. Both of them face the same scenario: Dave has the option of pleading guilty or not guilty. If he pleads not guilty, Henry can plead not guilty and get a two-year sentence, or he can plead guilty and get a one-year sentence. It is in Henry's best interest to plead guilty if Dave pleads not guilty. If Dave pleads guilty, Henry can plead not guilty and receive a five-year sentence. Otherwise he can plead guilty and get a three-year sentence. It is in Henry's best interest to plead guilty if Dave pleads guilty. Dave faces the same decision matrix and follows the same logic as Henry. As a result, both parties plead guilty and spend three years in jail although through cooperation they could have served only two. A true prisoner's dilemma is typically "played" only once; otherwise it is classified as an iterated prisoner's dilemma.

VIDEO

Loading the player...
RELATED TERMS
  1. Zero-Sum Game

    A situation in which one person’s gain is equivalent to another’s ...
  2. Decision Theory

    An interdisciplinary approach to determine how decisions are ...
  3. Dollar Auction

    The basic dollar auction is based on the auction of a $1 bill ...
  4. Liar's Poker

    A game often associated with Wall Street traders who use statistical ...
  5. Iterated Prisoner's Dilemma

    A normal prisoner's dilemma played repeatedly by the same participants. ...
  6. Tit For Tat

    A game-theory mechanism which is subject to a payoff matrix similar ...
RELATED FAQS
  1. How is game theory related to the Nash equilibrium?

    The Nash equilibrium is an important concept in game theory referring to a stable state in a game where no player can gain ... Read Full Answer >>
  2. Is finance an art or a science?

    The short answer to this question is "both". Finance, as a field of study and an area of business, definitely has strong ... Read Full Answer >>
  3. What is the relationship between research and development and innovation?

    Although it's possible to achieve innovation without research and development and it's possible to conduct research and development ... Read Full Answer >>
  4. How is minimum transfer price calculated?

    A company that transfers goods between multiple divisions needs to establish a transfer price so that each division can track ... Read Full Answer >>
  5. How does neoclassical economics relate to neoliberalism?

    While it may be likely that many neoliberal thinkers endorse the use of (or even emphasize) neoclassical economics, the two ... Read Full Answer >>
  6. What are common concepts and techniques of managerial accounting?

    The common concepts and techniques of managerial accounting are all the concepts and techniques that surround planning and ... Read Full Answer >>
Related Articles
  1. Options & Futures

    Game Theory: Beyond The Basics

    Take your game theory knowledge to the next level by learning about simultaneous games and the Nash Equilibrium.
  2. Fundamental Analysis

    The Basics Of Game Theory

    Break down and examine the potential consequences of economic/financial scenarios.
  3. Fundamental Analysis

    Understanding the Profitability Index

    The profitability index (PI) is a modification of the net present value method of assessing an investment’s attractiveness.
  4. Economics

    What is Neoliberalism?

    Neoliberalism is a little-used term to describe an economy where the government has few, if any, controls on economic factors.
  5. Fundamental Analysis

    Explaining the Monte Carlo Simulation

    Monte Carlo simulation is an analysis done by running a number of different variables through a model in order to determine the different outcomes.
  6. Economics

    Understanding Limited Liability

    Limited liability is a legal concept that protects equity owners from personal losses due to their ownership interest in the company.
  7. Economics

    Calculating Income Elasticity of Demand

    Income elasticity of demand is a measure of how consumer demand changes when income changes.
  8. Economics

    Understanding Implicit Costs

    An implicit cost is any cost associated with not taking a certain action.
  9. Fundamental Analysis

    Explaining the Empirical Rule

    The empirical rule provides a quick estimate of the spread of data in a normal statistical distribution.
  10. Economics

    Understanding Diseconomies of Scale

    Diseconomies of scale is the point where a business no longer experiences decreasing costs per unit of output.

You May Also Like

Hot Definitions
  1. Multicurrency Note Facility

    A credit facility that finances short- to medium-term Euro notes. Multicurrency note facilities are denominated in many currencies. ...
  2. National Currency

    The currency or legal tender issued by a nation's central bank or monetary authority. The national currency of a nation is ...
  3. Treasury Yield

    The return on investment, expressed as a percentage, on the debt obligations of the U.S. government. Treasuries are considered ...
  4. Bund

    A bond issued by Germany's federal government, or the German word for "bond." Bunds are the German equivalent of U.S. Treasury ...
  5. European Central Bank - ECB

    The central bank responsible for the monetary system of the European Union (EU) and the euro currency. The bank was formed ...
  6. Quantitative Easing

    An unconventional monetary policy in which a central bank purchases private sector financial assets in order to lower interest ...
Trading Center
×

You are using adblocking software

Want access to all of Investopedia? Add us to your “whitelist”
so you'll never miss a feature!