DEFINITION of 'Iterated Prisoner's Dilemma'

The iterated prisoner's dilemma is an extension of the general form except the game is repeatedly played by the same participants. An iterated prisoner's dilemma differs from the original concept of a prisoner's dilemma because participants can learn about the behavioral tendencies of their counterparty.

The iterated prisoner's dilemma at times has been called the "Peace-War game."

BREAKING DOWN 'Iterated Prisoner's Dilemma'

Since the game is repeated, one individual can formulate a strategy that does not follow the regular logical convention of an isolated round.
"Tit for tat" is a common iterated prisoner's dilemma strategy.

The iterated prisoner's dilemma game is fundamental to many theories of human cooperation and trust. Based on the assumption that the game can model transactions between two people requiring trust, cooperative behavior in populations may be modeled by a multi-player, iterated, version of the game.

The theory behind the game has captivated many scholars over the years. More recently, organizational design researchers have used the game to model corporate strategies. The prisoner's dilemma is also now commonplace for game theories becoming popular with investment strategist. Globalization and integrated trade have further driven demand for financial and operational models that can describe geopolitical issues.

Example of the Iterated Prisoner's Dilemma Game

For example, you and a colleague, are in jail and suspected of committing a crime. You are isolated from each other and do not know how the other will respond to questioning. The police invite both of you to implicate the other in the crime (defect). What happens depends on what both of you do, but neither of you know how the other will respond. If your colleague betrays you (yields to the temptation to defect) while you remain silent, then you receive the longest jail term while your colleague gets off free (and visa versa). If you both choose to cooperate with each other (not the police) by remaining silent, there is insufficient evidence to convict both of you, so you are both given a light sentence for a lesser crime. If both of you decide to defect, then you have condemned each other to slightly reduced but still heavy sentences.

The payoff in this game is a reduction in prison sentencing of very good, fairly good, fairly bad or very bad, which is translated into a point score system as follows:

  What your colleague does
This table shows payoffs to you for various outcomes. Co-operate Defect
What you do Co-operate Fairly good.
REWARD
for mutual co-operation.
3 points

Very bad.
SUCKER'S PAYOFF.

0 points

Defect Very good.
TEMPTATION
to defect.
5 points
Fairly bad.
PUNISHMENT
for mutual defection.
1 point

The game is played iteratively for a number of rounds until it is ended (as if you are repeatedly interrogated for separate crimes). The scores from each round are accumulated, so the object is to optimize the point score before reaching game over. Game over is determined randomly anywhere between 1 and 100 rounds. At the end of the game, the scores are translated into percentages of the best possible scores.

RELATED TERMS
  1. Backward Induction

    In game theory, backward induction is the process of deducing ...
  2. Financial Cooperative

    A financial cooperative is a financial institution that is owned ...
  3. Decision Theory

    Decision theory is an interdisciplinary approach to determine ...
  4. Robert J. Aumann

    Robert J Aumann is a mathematician and economist famous for his ...
  5. Mechanism Design Theory

    Mechanism design theory is an economic theory that seeks to study ...
  6. Cooperative Insurance

    Cooperative insurance is for owners of co-op apartments – or ...
Related Articles
  1. Insights

    The Prisoner’s Dilemma in Business and the Economy

    The prisoner’s dilemma provides a strategy or framework for understanding how to strike a balance between cooperation and competition.
  2. Insights

    How Game Theory Strategy Improves Decision Making

    Game theory, the study of strategic decision making can be used in many fields, including business, finance, and economics to improve decision making.
  3. Investing

    The Business Model Of Private Prisons

    How does the business model of private prisons work?
  4. Insights

    The Basics Of Game Theory

    Take an introductory look at game theory and the terms involved, and get familiar with backwards induction, a simple method for solving games.
  5. Investing

    Gaming ETFs Take Off

    The gaming industry is on the rise thanks to global hotspots like China.
  6. Tech

    You Love Video Games, But Do You Know How The Industry Works?

    Traditionally, the video game industry was limited to consoles, such as Microsoft’s (MSFT) Xbox and Sony’s (SNE) PlayStation, but it now includes PC games, mobile games and, in the near future, ...
  7. Investing

    Private Prison REITs Suffer on DoJ Decision (CXW, GEO)

    The markets have overreacted to the Department of Justice ruling, tanking the private prison REITs to rock bottom levels.
  8. Tech

    Are Big Budget Video Games Dead?

    More people seem to be gaming on tablets and smartphones over consoles, which means this could be the end of big budget console games.
  9. Investing

    Gaming Stocks to Watch in 2017 (ATVI, NTES)

    2016 was the best year in history for the video game industry. Will 2017 be even stronger?
  10. Tech

    Microsoft to Enable Game Gifting in the Xbox One Store

    Microsoft revealed in a tweet that it will soon let customers gift games via the Xbox One Store.
RELATED FAQS
  1. What is the difference between a dominant strategy solution and a Nash equilibrium ...

    Dive into game theory and the Nash equilibrium, and learn why the equilibrium assumptions about information are less important ... Read Answer >>
Trading Center