Prisoner's Dilemma

The prisoner’s dilemma is a metaphor that describes a situation where two people are arrested and interrogated separately. Each of them has a choice. If they both keep quite and if neither of them does anything, then they will both suffer only a mild punishment. But, if one of them were to implicates the other, and if that person were to stay quiet, then the speaker would get free with no punishment, but the other person would get a severe punishment. If they both spoke about each other, then they both get a severe punishment.

The dilemma centers on the issue of trust in a group dynamic. If you can get everyone to accept a little loss, then no one will lose big. But the personal incentive is that if you can be the one to move first, and if the other person were to stay put (and do nothing), then you would get away relatively unharmed, and the other person would suffer all of the dire consequences. But this would potentially backfire if the other person were to also take defensive actions and implicate you. So, your best option, and the one that has the greater good for everyone involved, is for you to both agree (and actually go along with a plan) where both of you get hurt a little, but neither of you take a severe punishment.

This metaphor is widely used when discussion centers on global financial crisis. For example, it was discussed in our book regarding the Asian Financial crisis with regards to how the IMF handled the contagion effect and South Korea.

In the case of South Korea, we saw a situation where many private banks were nervous about a looming debt crisis, and therefore had the incentive to be the first to pull their money out of South Korea (and thus protect their money, but endangering everyone else’s). But if too many people pulled their money out, however, it would create a panic, and would lead to a banking crisis (like the one that was going on in Thailand and much of SE Asia at the time).

Much like the prisoners in the metaphor, it was in the best interest of all of the banks to cooperate and stick together. If any of them were to break away and run for the door, they might make it, but if all of them tried to run for the door at the same time, none of them would make it (and everybody would suffer). The interests of the group as a whole were for everyone to stay, but the interests of each individual were for them to cut and run (and do it before anyone else does).

The result of this particular “prisoners dilemma” actually has a happy ending. In this particular example of South Korea, the IMF was successful in keeping all of the major players in the country, with none of them breaking ranks and running for the door. In the book they described this as one of the IMF’s shining moments of success during the Asian Financial crisis (using tough tactics of intimidation in some cases) to keep all of the banks in line, and to keep their money in the country.