GAME THEORY

One of the most famous and most thoroughly studied examples of game theory is the Prisoner’s Dilemma. In this situation, the police have caught two people and charged them with a crime. The police separate the prisoners into different rooms and give them the option of confessing. The police tell the two prisoners that they have enough evidence of the crime to send them to jail for X amount of years. However, if one …

…all prisoners who do not confess and not penalizing all those who do confess. This is very advantageous for the police because, for all rational situations, it puts a limit on the actions of the prisoners. Making a commitment also puts the police in a bad situation. If the prisoners are irrational and do not confess, then everyone loses. This brings up two very interesting economic principles. The principle of “Rules rather than discretion” and