The standardized example of prisoner’s dilemma, originally proposed by mathematicians Merrill Flood and Melvin Dresher, and then formalized by Albert W. Tucker, presents the following situation:
Betraying the other prisoner offers a greater reward than cooperating with them, so it can be assumed that all purely rational prisoners will betray the other, resulting in the only possible outcome being both prisoners betraying each other.
Pursuing individual reward logically should lead to a better result; however in a prisoner’s dilemma, pursuing individual reward leads to a worse individual result.
Prisoner’s dilemmas occur in many aspects of the economy, but a variety of solutions have been proposed and implemented over time that favors the common good over individual incentives.
For example, in real-world situations, most interactions are repeated more than once. If a prisoner’s dilemma occurs more than once, it can be referred to as an iterated prisoner’s dilemma. In such a situation, the individual actors can implement strategies that reward cooperation over time.
Another solution is formal, institutional strategies that alter the incentives that individual decision-makers can potentially face. By having an understanding of the collective goals and the ability to enforce cooperative behavior through various sets of rules, prisoner’s dilemmas can be steered towards the more collectively beneficial outcome.