The concept of the Prisoner’s Dilemma is important to a number of business school subjects, including economics and negotiations. The current Trump administration provides a rich opportunity to explore this concept in the context of important policy deliberations.
To explain the concept, consider the example of George and Gracie. Imagine that George and Gracie have been arrested for a crime and placed in separate jail cells. They can’t communicate. Both care about getting out quickly and care less about the other. Each is given an offer. George is told, “You can confess or not. If you ‘rat’ on Gracie and she doesn’t rat you out, you will go free and Gracie will spend 10 years in prison. Likewise, if Gracie rats on you and you stay silent, she will go free while you spend 10 years in the pen. If you both rat out each other, you will both get five years. If neither of you talks, I can only get two years for each of you.” Gracie is given similar information.
What should each of them do? This is a classic Prisoner’s Dilemma. No matter what Gracie does, George improves his position by ratting her out. The same rationale faces Gracie. The Dilemma is that if each pursues this rational self-interest approach, the outcome is suboptimal (five years in prison). The Dilemma highlights a conflict between individual and group rationality. People who go against rational self-interest may do better than those who pursue self-interest. It also highlights the challenges facing rational players as they try to cooperate for the common good.
Variations of this dynamic play out constantly in our lives, between parents and children, co-workers, companies and customers, spouses, and in countless interactions. In reality, the two sides have the potential to communicate with each other and to try to negotiate their way out of these sub-optimal “rational” decisions that may leave both sides dissatisfied and worse off. Nevertheless, many of our real life conflicts end up with sub-optimal outcomes.
This also happens between countries and is playing itself out in many of President Trump’s recent actions involving tariffs. Bilateral agreements between the U.S. and its trading partners confront the “Prisoner’s Dilemma” when it comes to the issue of tariffs. Consider when the President said on March 8, 2018, “he” will impose tariffs on steel and aluminum imports within 15 days. Tariffs represent a situation where the “rational” decision would appear to be to raise tariffs on imports and hope the other side either doesn’t or cannot. The “rational” decision typically leads to retaliation as it does in many prisoner dilemma situations.
Of course, President Trump doesn’t see tariffs as posing a prisoner’s dilemma type problem, at least in his public pronouncements: “When a country (USA) is losing many billions of dollars on trade with virtually every country it does business with, trade wars are good, and easy to win. Example, when we are down $100 billion with a certain country and they get cute, don’t trade anymore-we win big. It’s easy!” (March 2, 2018 Twitter)
Not surprisingly, other countries threaten to retaliate. China, Canada, and the European Union have already said they would respond by enacting tariffs that could result in extensive American export losses affecting industries and farms that the President had claimed to protect. Most economists feel that a trade war is disruptive and will make the world as a whole poorer.
Perhaps the President sees international trade as similar to the construction industry; i.e., as a forum where he can exert power and his will on the other party. What works in the construction industry where Trump gained his negotiation experience may not work in the very different world of international diplomacy. The President might have had leverage in dealing with contractors. But in international trade, the U.S. accounts for 9 percent of world exports and 14 percent of imports. This would not appear to be a position of domination.
Of course, another characteristic of President Trump’s negotiation style is to stake out an extreme position (anchor) in order to both intimidate an opponent and to give room to make concessions or compromise, and this may be the case with his tariff pronouncements.
In any case, for those of us who teach about the Prisoner’s Dilemma, we are “fortunate” to have a very important and very real ongoing public policy situation to observe and study.