(Most of the content here on game theory is a direct copy-paste from wikipedia)
The problem in the last post can be summarized as follows: “Will the two prisoners cooperate to minimize total loss of liberty or will one of them, trusting the other to cooperate, betray him so as to go free?”
The unique equilibrium for this game does not lead to a Pareto-optimal solution. That is, when two rational players both play defect even though the total reward (the sum of the reward received by the two players) would be greater if they both played cooperate. In equilibrium, each prisoner chooses to defect even though both would be better off by cooperating. This is the dilemma.
So much for Prisoners Dilemma…Now the Indian Situation….
Though the world calls us Indians illiterate and poor, I bet all of us fare much better in simple strategic situations in life. In other words we are “mostly” rational. (I say “mostly” because we are also driven by a good amount of Magical Thinking)
Now PD shows that when 2 rational entities try to maximize profits they tend to make decisions that worsen the situation as a group. This phenomenon is inevitable and will occur in every economy.
Some of the reasons why India has been a loser can be found in the next level of the problem: Iterated Prisoner’s Dilemma
In the iterated prisoner’s dilemma the game is played repeatedly. Thus each player has an opportunity to “punish” the other player for previous non-cooperative play. Cooperation may then arise as an equilibrium outcome. The incentive to cheat may then be overcome by the threat of punishment, leading to the possibility of a cooperative outcome. As the number of iterations approaches infinity, the Nash equilibrium tends to the Pareto optimum.
(to be continued…)