The Prisoner’s Dilemma is the obverse of Adam Smith’s theory of the invisible hand, in which the free market coördinates the behavior of self-seeking individuals to the benefit of all. Each businessman “intends only his own gain,” Smith wrote in “The Wealth of Nations,” “and he is in this, as in many other cases, led by an invisible hand to promote an end which was no part of his intention.” But in a market environment the individual pursuit of self-interest, however rational, can give way to collective disaster. The invisible hand becomes a fist.
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Limiting the development of [complex] securities would stifle innovation, the financial industry contends. But that’s precisely the point. “The goal is not to have the most advanced financial system, but a financial system that is reasonably advanced but robust,” Viral V. Acharya and Matthew Richardson, two economists at N.Y.U.’s Stern School of Business, wrote in a recent paper. “That’s no different from what we seek in other areas of human activity. We don’t use the most advanced aircraft to move millions of people around the world. We use reasonably advanced aircrafts whose designs have proved to be reliable.”
The second seems quite applicable to software engineering as well.
It's unfortunate that the article uses the Prisoner's Dilemma as its example, because the Prisoner's Dilemma is actually not the best game model to set up as the opposite of the Invisible Hand. A more appropriate model would be the Tragedy of the Commons, which was proposed by a fellow named Garrett Hardin in an article in a 1968 edition of Science magazine.
If you are interested in formal modeling of coordination problems, an interesting overview can be found in Elinor Ostrom's book Governing the Commons. In chapter one she gives an overview of the Prisoner's Dilemma, the Tragedy of the Commons, and the Logic of Collective Action (Mancur Olson's theory). After reviewing these abstract formal models, she looks at other possible institutional solutions for coordination problems.
Any quick one-liners or easy-to-understand wisdom that you've gained from the material? The entire subject area looks immensely fascinating, yet very dense at times.
Yes, game theory can get inscrutably complex, even through the initial models are pretty simply to set up and understand.
The basic components of any coordination/cooperation problem are the same: you have actors with preferences, you have a situation with rules that they can't change, and you have outcomes with payoffs/penalties depending on whether the actors choose to cooperate or not.
Most of the problems revolve around how to get people to cooperate, when defection is attractive for some reason. Most of the solutions involve making sure situations are not one-off interactions, that all actors have information about what each other is doing, and that in the case of multiple actors using common resources, you need to have some form of monitoring and enforcement.
If actions are one-off, the temptation to act selfishly is higher than if actors know they are in a long-term situation in which they must choose to cooperate or defect time and time again. In this way information such as reputation can then function as a signaling device to other actors.
Games such as the Prisoner's Dilemma work only when presented as a one-off situation in which both actors have no information about what they other is going to do. So the solution is 1) make sure you're not setting up one-off interactions, and 2) make such actors are in an information rich environment wherein they can make appropriate signals about their intentions and past behavior.
Most of the other games, such as Tragedy of the Commons or Battle of the Sexes, have stable solutions if you repeat them and increase the information available to the actors. The equilibrium solutions are called Nash Equilibriums, after John Nash, the paranoid schizophrenic mathematician featured in the movie A Beautiful Mind.
The tragedy of the commons works like this: If everyone follows their self interest and goes fishing in the lake, pretty soon all of the fish will be gone and it will take decades for them to repopulate. If you somehow (how to do it is a coordination problem) arrange for only a small number of people to fish, they can bring in reasonable number of fish every day for many years.
The upshot: In some markets, like consumer electronics, supply and demand regulates things very efficiently. In others, unconstrained individual interest can ruin everything.
In the financial markets, individuals acting rationally for themselves can cause damage to the overall economy: crashes, bubbles, bank runs, etc.
" If everyone follows their self interest and goes fishing in the lake, pretty soon all of the fish will be gone and it will take decades for them to repopulate. "
Or, everyone follows their self interest and realizes that they will need to work out some agreements to moderate fishing or there will be no fish.
> Or, everyone follows their self interest and realizes that they will need to work out some agreements to moderate fishing or there will be no fish.
This can have downsides, namely the sort of "credentialism" that's often derided on this site (licensing for interior decorators, etc.) All the players in some industry decide that it's in their best interest to appeal for regulation which will prevent others from entering this industry.
Oh, absolutely. I just don't buy the idea that the default expected behavior from people is to shot themselves in the foot so blindly (e.g., a race to see who can empty the lake first).
That people may slowly stab themselves in the foot repeatedly is more likely.
The problem is that even if 90% of the fishers in an area are responsible, the remaining 10% can ruin it for everyone. And no one has any incentive, other than their conscience, to cooperate. And that's why it's a tricky problem.
One difference between designing airplanes and govt regulation is that designing airplanes isn't prone to folks making design decisions to benefit to friends and family.
Political corruption is pretty much a fact of life whenever govt gets involved in money.
I don't see why folks who complain about corruption involving govt contracting believe that financial regulation will be any better.
The Prisoner’s Dilemma is the obverse of Adam Smith’s theory of the invisible hand, in which the free market coördinates the behavior of self-seeking individuals to the benefit of all. Each businessman “intends only his own gain,” Smith wrote in “The Wealth of Nations,” “and he is in this, as in many other cases, led by an invisible hand to promote an end which was no part of his intention.” But in a market environment the individual pursuit of self-interest, however rational, can give way to collective disaster. The invisible hand becomes a fist.
and
Limiting the development of [complex] securities would stifle innovation, the financial industry contends. But that’s precisely the point. “The goal is not to have the most advanced financial system, but a financial system that is reasonably advanced but robust,” Viral V. Acharya and Matthew Richardson, two economists at N.Y.U.’s Stern School of Business, wrote in a recent paper. “That’s no different from what we seek in other areas of human activity. We don’t use the most advanced aircraft to move millions of people around the world. We use reasonably advanced aircrafts whose designs have proved to be reliable.”
The second seems quite applicable to software engineering as well.