Cooperate or Compete?

Two conspirators in a crime are arrested and put into separate cells. Each is then offered a deal: “If you confess and testify against your accomplice, we’ll let you off and throw your accomplice in prison for 10 years."

If both stay quiet, the prosecutors cannot prove the more serious charges and both would spend just a year behind bars for lesser crimes. However if both confess, the prosecutors would not need their testimony, and both would get eight-year prison sentences.

At first glance, keeping quiet might seem the best strategy. If both did so, both would get off fairly lightly. Therefore cooperating with each other seems best.

But human nature shows they would likely both confess. Since there is means of communication between the two, without knowing what the other prisoner is doing, each is faced with this choice: If he confesses, he could end up with freedom or eight years in prison. If he stays quiet, he goes to prison for one year or 10 years. In that light, confessing is the better option. And he knows that the other prisoner has the same incentive to confess, so it is less likely he would stay quiet. Therefore competing (at the cost of betraying the accomplice) seems to be a more likely choice and in each prisoner’s self interest?

This is known as the prisoner’s dilemma. The?prisoner's dilemma?is a standard example of a game analysed in game theory that shows why two completely?rational individuals might not cooperate, even if it appears that it is in their best interests to do so. When this game is played as a one off, studies have shown that the decision to confess and take a chance at freedom is the over-riding human instinct of both prisoners. This could be because if you are unlikely to work with your accomplice in the future, you could care less about the effect your decision to confess, has on his life.

However, when this game is repeated again and again (while the participants remain the same), studies have shown that prisoners start cooperating with each other more often than not. Which means that they chose to remain silent and endure the 1 year prison term. If you have let down your accomplice by confessing to your crime in the 1st round, then the next time your accomplice is faced with the same situation he is unlikely to easily forget your betrayal.

The Prisoner’s Dilemma is often played out in everyday life. You can take a leaf from it in your personal finances too. Think about when you are negotiating a job offer. If you negotiate too hard on the salary and get the job, you may think you have got your worth. However your future boss may not feel too pleased. Once you join work, you will be looking at continuous engagements with your boss after all. Therefore it makes sense to cooperate and aim for a win-win outcome. Of course it does not mean you take the first salary offered, but negotiate with kid gloves on. Find out information about the salary bracket for your skillsets and experience (a few dedicated internet searches should yield this), so you know the range, then see how close you can get to the top end of the range while negotiating politely and patiently.

What if you are in the market to buy a new car? You would naturally visit a few dealerships nearby and check out the deals. Now you know the sticker price. But are you going to pay it? Most humans are wired to bargain hard for the best deals when shopping for a car. Therefore competing makes more sense in this situation. You are in competition with the dealer. The dealer will try to protect his margins the most, while you will be negotiating to extract the maximum possible savings. One way to get a good bargain is knowing what you want. If you do not get what you want - be prepared to walk away. If you have selected the car model, you can make your intention clear by telling the dealer the date and time you intend to make the purchase and ask them to make their best offer, slipping in that you are in talks with other dealers too. Every car dealer has a monthly sales target to achieve and knowing that you are shopping around, he will make an offer. Square off with the dealer who makes the best offer. Month ends, Financial Year ends and Festive seasons are a good times to get the car deal you want.

The human race has come thus far in the cycle of evolution by cooperating with each other, whether as hunters stalking prey or building space ships that explore the outer reaches of space. Cooperation is a long term strategy for progress, while competition is a short term strategy driven by self-interest. However in the individual context each strategy has its place, although the participants of the game may not always be rational in their behavior. No matter what, a good deal in life can be earned by keeping a calm and rational mind.?

Author: Ashish Joseph George, MMS, CFP. The views shared in this article are my personal views and don’t reflect the views of any organization. This is not an investment advice