Are you Stuck in a Prisoner's Dilemma?

Prisoner's dilemma is a famous scenario in game theory. In this scenario, two people commit a crime and get caught. The investigator separates the perpetrators and interrogates each individually. The perpetrators have two options: they can either stay silent or cooperate with the investigator. If both remain silent, then they both get a short sentence. If one testifies and one stays silent, the testifier goes free and the silent one gets a long sentence. If both testify, then both get a medium sentence.

The rational perpetrator will always choose to testify because it has the better outcome regardless of the other's action. If the partner-in-crime remains silent, then he goes free instead of serving a short sentence, and if the partner-in-crime testifies, he gets a medium sentence instead of a long sentence. As a result, both perpetrators testifying is the rational outcome known as the Nash equilibrium of the game.

This game is analogous to many situations in business negotiations and relationships, or among business competitors. Oftentimes, the best outcome or least damaging outcome for the group is when both parties cooperate, but they act in self-interest instead and create a sub-optimal outcome for the group.

Fortunately, in reality, you are rarely confined by the parameters defined in the theoretical scenario. There are things we can do to alter the framing of the game and the behavior of the participants to produce better results. It can be through the restructuring of the information available, creating a different set of possible outcomes, and/or encouraging alternative behaviors.

Information-Based Strategies

1. Build Trust

• Repeat interactions: If parties expect to work together again, they can learn from previous outcomes, and cooperation increasingly becomes more attractive. (Iterated Prisoner's Dilemma)

• Building a strong reputation: A history of fair dealing increases the incentive for others to cooperate with you.

  
  

2. Increase Transparency

• Share credible information (costs, constraints, deadlines). Part of the dilemma is attributed to the lack of information about the other party.

• Use third parties (mediators, auditors) to validate claims and reduce fear of exploitation.

Outcome-Based Strategies

3. Align Incentives

• Structure deals where both sides benefit more from cooperation than from short-term opportunism. For example: gain-sharing contracts, joint ventures, revenue-sharing agreements.

  
  

4. Punish Defection

• Make agreements legally binding to reduce the incentive to defect.

• Build in penalties, service-level agreements, or clawback clauses.

Behavior-Based Strategies

5. Reframe the Negotiation

• Move from zero-sum thinking ("if you win, I lose") to integrative bargaining (expand the pie).

• Explore trade-offs: what’s low cost to you but high value to them, and vice versa.

  
  

6. Signal Cooperation Early

• Start with small concessions to show goodwill. Reciprocity is powerful and well-researched in behavioral economics. One cooperative act encourages the other party to reciprocate.