The Prisoner’s Dilemma

日期:2013/09/24

The Prisoner's Dilemma is very well analyzed in the highly recommended very technical book, Evolutionary Dynamics by Martin Nowak.

The two by two payoff matrix:





                         Remain Silent       Confess


Remain Silent          -1                      -10

Confess                     0                       -7

shows payoffs to you if you and your colleague have committed a crime. The D. A says that if you confess and your colleague doesn't, you go free. But if you don't confess and he confesses you get 10 years in jail. But if you both confess you both get 7 years in jail. But if you both are silent, you both get just 1 year in jail because they can't prove anything.



The problem is that you do better by being disloyal to your partner. And so does he.

Rapaport has a very good solution to this problem if you play the game repeatedly. It has many applications to trading. If you are a flexion and you have inside information, perhaps from being one of the hundred people receiving economic releases in advance on a need to know basis, and your conspirator is a trend follower, or someone you are revealing the news to, as so often happens, you do better if you act but your colleague doesn't. Same for him. But if you both act, you'll move the market and the opportunity will be lost.

What other situations in markets can be modeled by the prisoners dilemma, and how do the solutions that Nowak and Wiki discuss illumine our trading, and enlighten us as to the disadvantages we face.