I read a different article with the same concept as the following but about business and found it fascinating. This is a make of it, and completely fictional of course.
One cold Saturday evening, instead of going and partying, John and Smith decided to rob a gas station. So they grab a gun (an illegally possessed one) and drive to the gas station. They put their black ski mask on and do their bad deeds, and make their getaway. Immediately after the robbery John and Smith hide their stolen items and their mask and within seconds they are on the road again. Everything is well, except they forgot one thing. They forgot to hide their illegally possessed gun.
Well this liquor shop owner isn’t a dull guy. He catches a glimpse of the car and immediately calls the police. Not long a police car spots their car, which fits the description of the car reported by the liquor shop owner. John and Smith are immediately pulled over and arrested by the police.
The police take them down to headquarters but realize that they have no evidence linking John and Smith to the crime. Sure the car matched the description but there is no concrete proof. However the police are pretty confident that these two are the perpetrators and the only thing they have justifying the lockup is possession of an illegally possessed handgun. The top sentence in the state is one year for illegal gun possession. However the cops don’t want to let them off that easy with one year and want to charge them for armed robbery, a much more serious crime.
Well John and Smith figure that if they both keep quite and say nothing it’s only one year of jailing. They are egoist and very rational (in the sense that they will behave intelligently in pursuing what’s best for them: avoiding jail time).
Well these well-trained cops aren’t donut munchin’ dudes. They are smart and want to get a conviction by having them squeal. So they separate the John and Smith and give them each a deal. This is the deal given to Smith:
If you refuse and if your partner, John refuses then you’ll both end up serving one year in jail because of the illegal gun possession. But we want an armed robbery conviction, and we’re willing to compromise to get it. So, Smith if you confess and turn in John, he’ll get 10 years, but you’ll walk. However there is a catch: I’m making him the same deal, which means if he takes it and you refuse you’ll be spending 10 years in jail while he walks. On the other hand if you and she both take the offer, you’ll both get about six years each. So if you turn him in there’s a chance you’ll end up with six years of jail time instead of zero years. On the other hand if you don’t confess, while he does you might end up with 10 years. So what’s it gonna be, dude?
Because these well-trained smart cops gave them both a one time offer, John and Smith are forced to play a very difficult game and there are four possible outcomes.
Each entry in the box represents the “payoff” for the first player John and then the payoff for the second player Smith. Four possible outcomes are:
1) Neither confess — (1 Year for each)
2) Both confess (6 Years for each)
3) John confesses, while Smith doesn’t (10 for Smith, 0 for John)
4) Smith confesses, while John doesn’t (10 for John, 0 for Smith)
What will John and Smith do? They both will get 6 years. You think they are both morons? No they both are rational egoists who acted in the manner what’s best for them. Think about it this way:
John will either confess or he won’t.
If John confesses, then Smith is better of confessing.
If John doesn’t confess then Smith is better of confessing.
Thus Smith is better of confessing.
Did they make a mistake? Perhaps you are inclined to say that they must have for they ended up with six years instead of one. But if that is what your thinking your making a mistake. Your assuming that when each member of a group is behaving rationally then things must turn out all right. This is wrong because John and Smith both did what was best for them relative to their own private interests. If they are rational egoist who want to try to get the least term, they cannot do otherwise than to squeal.
If everyone in a group does everything right, the outcome does not have to be correct. Similarly if an outcome comes out negative, assuming that this is negative for all parties involved is also mistake.