codebytsPrisoner’s Dilemma

TJ Gokcen@tjgokcen@codebyts

If men were actuated by self-interest, which they are not— except in the case of a few saints— the whole human race would co-operate. There would be no more wars, no more armies, no more bombs.

Bertrand Russell

Game Theory

• Search For cooperation, especially human cooperation

• Game Theory: a branch of mathematics, study of strategic decision making

• Game Theory games applied to business and economics

Dr. John Forbes Nash, Jr.

Dr. John Forbes Nash, Jr.

Cooperative / Non-cooperative

• A game is cooperative if the players are able to form binding commitments.

• For instance, the legal system requires them to adhere to their promises.

• In noncooperative games, this is not possible.

Simultaneous / Sequential• Simultaneous games are games where both players move

simultaneously, or if they do not move simultaneously, the later players are unaware of the earlier players' actions (making them effectively simultaneous).

• Rock-Paper-Scissors

• Sequential games (or dynamic games) are games where later players have some knowledge about earlier actions.

• Strategy Games

Perfect / imperfect information

• When the players have perfect information:

• Ultimatum Game

• When there is no perfect information:

• Poker

Ultimatum Game

• Alex is given $500.

• Alex, makes an offer to give some of this money to John.

• If John, accepts both of them get to keep the money.

• If John refuses, both lose.

Combinatorial• Games in which the difficulty of finding an optimal strategy

stems from the multiplicity of possible moves

• There is no unified theory addressing combinatorial elements in games.

• There are mathematical tools that can solve particular problems and answer general questions.

• Chess

Zero-sum / Non-zero-sum

• In zero-sum games the total benefit to all players in the game, for every combination of strategies, always adds to zero

• Poker

• Non-zero sum games, are where outcome has net results greater or less than zero

• Prisoner’s Dilemma

Symmetric / Asymmetric

• A symmetric game is a game where the payoffs for playing a particular strategy depend only on the other strategies employed, not on who is playing them.

• If the identities of the players can be changed without changing the payoff to the strategies, then a game is symmetric.

• Many of the commonly studied 2×2 games are symmetric.

Prisoner’s Dilemma• 2 criminals get busted for drugs.

• If they keep their mouths shut, they will both walk away.

• But if one rats out the other, the snitch will go free and the other will do time.

• If both turn on each other, both will do time … but probably not as much, since they have both cooperated with the prosecution.

Prisoner’s Dilemma

• They are in separate cells being sweated by the cops.

What do they do?

© 2010 Encyclopedia Britannica, Inc.

• Race for more sunlight

• If trees can agree to a certain height, • each can focus on other activities, like

reproduction

Red Queen Effect• Lions chase antelopes . Lynxes chase rabbits. Over time, the

antelopes and the rabbits get faster. But so do Lions and lynxes.

• The antelopes and rabbits that are faster than their peers survive longer, and pass their genes on to the next generation.

• In the end, generations are faster than the ones before, but no net gain to any of them.

Red Queen Effect in Business

• We work longer hours in the office than our parents or grandparents

• There is no net advantage in this

• We are getting better just to stay where we are.

Red Queen Effect in Business

• Look at business plans of the 5 largest competitors in any market

• It’s certain that they all would be planning to increase market share by being better than they are today

• However• This is not possible (not everybody can gain market

share at the same time)• Everyone else will get better (Red Queen Factor)

Corporations and Cooperation

• Excellent at the currencies of reason and cash

• Cold, efficient and low cost

• ITT, GE, IBM, Ford, Oil Companies, Monsanto

Corporations and Cooperation• Excellent at the currencies of emotion, commitment, trust and

love

• Better cooperators

• Inspire significant affection in their customers, employees and suppliers

• The Body Shop, Netflix, Google, Apple, Pixar

Corporations and Cooperation

• As employees become better educated and wealthier, the balance of power between the corporation and the individual shifts in favor of the latter.

• Gaining the cooperation of the best employees may be the ultimate frontier in competition, at least in knowledge-intensive companies.

Corporations and Cooperation

• Some statistical support for the importance of cooperation is provided by a study undertaken by the Business Round Table and quoted by Robert Waterman.

• A 30 -year study of ‘socially responsible’ companies— presumably excellent cooperators— showed that they outperformed the Dow Jones index by 7.6 times!

Cooperation vs Competition

• Cooperation is how we create value: how we create the pie.

• Competition is how we capture value: how we grab our slice of the pie.

Tit for Tat

Tit for Tat• Long-term advantage often requires cooperating players to ‘take

turns’ in collecting the payoff:

• I let you win the biggest prize this time, perhaps taking nothing myself, if you let me take the biggest prize next time.

• Cooperation is about comprehending how to make the pie bigger, on the understanding that when we have to divide it, we will behave reasonably, within the context of a long-term relationship.

Tit for Tat• We see this behavior in mall shops:

• Even if there is a competition between shops in a mall, attracting more customers to the mall (making the pie bigger), is to all’s benefit.

• But for tit-for-tat to work, you need trust

• The more trust, the more this strategy is effective

• Teams, divisions in a company need to trust each other

Tit for Tat• Operating System developers (desktop or mobile) (Microsoft,

Apple, Google) require powerful chips (from Intel, AMD, ARM)

• These chips make software feasible and economic.

• Same as telecommunication companies

• Bigger the pie, better for all of them.

Players• Identify the players and categorize them into customers, suppliers,

competitors, and complementors.

• A competitor is a complementor if your customers value your product more when they also have that other player’s product.

• If they value your product less when they have the other player’s product, then it is a competitor.

• Same applies to suppliers.

Added Value• Add up the total value supplied by all the players.

• Now repeat that, but for all the players except yourself.

• The difference is what you uniquely add— it’s often quite small.

• Your strategy , and in particular whether you encourage or rebuff cooperators, can determine how much value there is in the system.

Rules• Rules are an important part of the game and can often be subtly

shifted in your favor.

• But rules can always be rewritten by a creative player who has real value to add.

Tactics• Businesses operate under a fog

• Sometimes it is useful to clear the fog: Advertising what’s coming

• But sometimes it is better to operate under a fog.

• In 1992, American Airways introduced simplified air fares.

• Others retaliated

• Airline industry lost $5b as a result

Scope• Look beyond the boundaries of the game.

• No business game is an island.

• Players in one game also play in others.

• Anticipate and prevent, or at least delay, such invasions.

Conclusions• Build trust within teams

• Build trust between companies, however;

• Two computer programs were made: Jesus and Lucifer

• When Jesus played Generous Tit for Tat, Lucifer attacked and the whole system broke down

Lesson?

Conclusions

Be generous. Be nice. But be smart.