The Prisoner’s Dilemma is a well-known game where we can learn about human behavior. It is part of the area of Game Theory.
This post looks at what the Prisoner’s Dilemma is, how it applies to strategy and project management, and how insights from it can be used to improve outcomes.
Basic Prisoner’s Dilemma Explained
The assumption is that both Prisoner A and Prisoner B have committed a crime. Authorities are trying to get them to confess – and provide evidence against the other Prisoner. However, they are isolated from one another. Each has the opportunity to either act out of self-interest (defect) for a better personal outcome – with the risk of a worse outcome for the other prisoner, and maybe even himself. Each also can choose to cooperate in silence with the other for a better overall outcome, at the risk of betrayal by the other.
The figure shows the choices that each faces:
- If both A and B choose to remain silent, each will serve one year in prison.
- If A chooses to remain silent and B defects, A will get 3 years in prison and B goes free.
- Just the opposite, A can defect while B remains silent, and B will serve a term of 3 years while A goes free.
- Together they run the risk that, if both defect, they will each serve two years in prison.
The best outcome – each serving one year in prison – occurs when both cooperate in silence.
The worst outcome – each serving two years in prison – occurs when both defect by telling on the other.
Each has the potential individually to go free – 0 years in prison – if they defect and the other cooperates.
And each has the risk of the worst outcome – three years in prison – if they cooperate and the other defects.
This is quite a dilemma, and the result for each depends on the choices of both!
Make a Game of the Prisoner’s Dilemma
Using game theory, a researcher constructs scenarios with participants using the Prisoner’s Dilemma framework to see what might happen. Researchers can derive insights from what happens, and even construct mathematical models to better understand the potential outcomes. Scenarios even include repeating the dilemma multiple times and observing how participants learn.
The idea is to gain insights into how people will behave in situations where there are competing payoffs for cooperating versus acting in self-interest. It also provides insights into how situations can be reconfigured to encourage more cooperation for the optimal result for the organization as well as the individual.
Applying the Prisoner’s Dilemma to Strategy
Competitors in the marketplace are always concerned with, and affected by, the choices made.
The following 1 minute video explains the conflict between cooperation and self-interest with a simple lemonade stand example.
Here are two examples:
Market share and strategy choice
What is the size of the market? Who are the potential or existing competitors, or industry participants? What are my company’s strengths…and what are those of the competitors?
There are some key questions to ask up front. Ultimately, a company needs to think through how it can best serve the market – and do so profitably. It will ideally choose one of the three generic strategies that aligns with the size and needs of the market, the character and strengths of competitors (existing and potential), and the company’s own strengths.
There will be a potential industry equilibrium that will involve fully serving the market, across the board, where some competitors might compete broadly on cost or differentiation, or narrowly with a cost or differentiation focus.
Ultimately, the objective for all participants would be to find a place in the market where it can serve customers well and be profitable – much like a Blue Ocean strategy. If not, it is better off not participating in the market. This avoids a situation where, in the end, no one is profitable – swimming with the sharks – and ultimately customers also are not well served.
The question is, can competitors ‘cooperate’ with each other legally and ethically in order to achieve a happy equilibrium? Will cooperation bring the best overall result? Or will any competitors choose to defect – not cooperate – and compete to the detriment of the whole, as in the Prisoner’s Dilemma?
Decision to enter a market or not
There may not be a desirable place in a market for some potential industry participants. Firms need to identify where their strengths, especially as compared to the strengths of competitors, existing or potential, can best serve customers in the market profitably.
It is a dilemma for a company to decide to cooperate with the inevitable – to avoid jumping into an overall unhealthy competitive situation. It is indeed a dilemma, as markets could be in transition – or could be vulnerable to disruptive forces. If they can disrupt, there is no reason to not “cooperate with the inevitable” and shake up the market to serve customers better.
However, under less than disruptive circumstances, the best strategic decision may be to stay out of the market.
Prisoner’s Dilemma and Collaboration on Projects
The Prisoner’s Dilemma applies to many situations involving human interactions. It lies at the intersection of the conflicts between collaboration and acting in self-interest. The Prisoner’s Dilemma and Game Theory can also involve interactions with machines, but I will leave that to another time.
I recommend these PM templates (paid link):
I think the key takeaway from the Prisoner’s Dilemma is that there are actions we can take that will help tip the scale toward collaboration, where the overall benefit as a whole is maximized. A related takeaway is to raise awareness of forces like this that can bring undesired consequences to the unaware.
Here are three specific areas in the realm of project management – estimating and scheduling, organizational structure, and negotiating – where these ideas can be applied:
Estimating and scheduling:
Estimating and scheduling are as much art as science. They not only involve hard core analysis, but also the exercise of judgment.
Estimating and scheduling well requires the following:
- Knowledge – PM’s must possess know-how with processes, tools, and concepts. Domain knowledge is also helpful.
- Collaborative culture – The environment must foster a willingness and desire to openly share information.
- Honesty – The PM needs to trust those who are providing input, and there needs to be an earned trust and value for the truth between the PM and stakeholders.
- Stakeholder interests – Conflicting interests can happen. PM’s need to balance the interests of various stakeholders to facilitate the best result for the project.
Organizational power structure:
Organizations can be functional or matrixed, and that will have an impact on the propensity of individuals to collaborate. There is a need to understand the organizational structure, formal and informal. The following are the three general types of organizational power:
- Positional power – Based upon formal position n the organization, the source of the power has less to do with encouraging collaboration than the individuals themselves.
- Relationship power – This is very powerful in influencing individuals to be more or less collaborative and cooperative.
- Expertise power – This is extremely important but less powerful in limiting collaboration as desired. But it takes management to keep the power of the expertise in perspective,
Regardless of source of power within the organization, it is necessary to practice observing and getting to know the players. This can bridge the gap to understanding what choices can be made in a cooperative manner, not out of self-interest, for the greatest benefit of the organization.
These things all contribute to maintaining a healthy environment for both individual action and responsibility combined with healthy collaboration to achieve the best overall results.
Power in negotiations often relates back to the levers of positioning, knowledge, and relationships, as enumerated in the organizational power structure above. In project management, it shows up in the normal course of execution.
An example is resource priorities. Collaboration for the common good is obviously the intended outcome. The question is, how can relationships be formally managed among projects so that when PM’s and stakeholders inevitably leverage their positions, knowledge, and relationships, the overall tone and results are cooperation.
I would not expect project teams, except maybe in extreme situations, to build a full out simulation to see what might happen! However, the principles learned in the Prisoner’s Dilemma are useful in thinking through what might happen, and arranging and monitoring things for the best results.
Conclusion and Further Resources
The Prisoner’s Dilemma and Game Theory provide insights as to basic human behavior in stressful situations. Will people collaborate or cooperate…or defect and act out of self-interest?
Have you experienced a situation where these ideas have produced a good outcome…or where they have spun out of control?
The following are some recommended resources to learn more:
The following 9 minute video from Khan Academy covers the Prisoner’s Dilemma and the related concept of the Nash Equilibrium.
I recommend these strategy resources (paid link):