Personal Finance and the Prisoner’s Dilemma

Imagine for a moment that you’re a prisoner. You’re sitting in your cell. A prison guard comes in and says, “We heard a rumor that you and your friend are involved in a conspiracy. Do you have anything you want to tell me? If you tell me, there will be no punishment for any involvement you have.”

Do you betray your friend? If so, there may be a reward in it for you. On the other hand, not betraying your friend can have a reward, too.

Here’s the catch: the reward you get also relies on what your friend does … a friend being questioned at the same time.

Here’s an example of how that might work.

If both of you maintain the trust and don’t betray each other, you’re both rewarded handsomely – you don’t get in trouble and you also maintain your friendship. If you betray each other, there’s a smaller reward for the both of you – you don’t get into additional trouble, but you’ve lost your friendship.

On the other hand, if one of you betrays and the other one does not, the betrayer loses a friendship while the other friend not only loses a friendship but also receives additional punishment.

In this instance, the upside and the downside for not ratting out your friend is much larger than the upside and the downside of betrayal.

What do you do? It’s an interesting exercise to think about.

Of course, what’s really interesting is that the prisoner’s dilemma shows up all the time when it comes to your money.

Here’s one example: you need (or want) a particular item. The company that makes such a product is essentially the other player in this dilemma.

The company can either sell you the best product for the lowest reasonable price (staying in alliance with you) or they can sell you a questionable product (betraying you). On the other hand, you can buy the product (staying in alliance with the company) or not buy it (“betraying” the company).

Whenever a company puts a product out there for you to buy, they’re playing this kind of game with you, except companies use marketing to convince you that you really need the questionable product. That’s what marketing is. It not only convinces you to move from the “not buy” to the “buy” column, it often convinces you to make the choice that the company involved can profit from.

Of course, you can change the rules, too, through research. If you actually study what you’re buying and find out what item actually is the best product for the lowest reasonable price, you not only “win” by having that “best in class” product, but the company wins as well and they get an indication that people want to see more products like that one.

You can go through this same logic with almost every single thing you spend money on: credit cards, insurance policies, and so on.

There are some things you can learn from this.

First of all, most of the time, the right choice for the customer is not to spend at all. The key thing to assess is whether or not your actual need is being fulfilled here. Is this something you actually need? Or is the company using the “betray” tactic of throwing marketing and press releases (disguised as news) around so that it seems like you need it?

The downside of not spending is that you don’t have a product that you probably don’t need. The upside is that you do have money for the things you do need and you have the time to actually figure out, on your own, what it is that you actually want.

Second, the customer who does their homework is rewarded. The more homework you do on a purchase, the more likely you are to find the item that fills your need for the best price.

Finally, buying something you don’t need is just as much of a waste as buying a bad version of something you do need. In either case, you’ve spent money on something that doesn’t improve your life, and every dollar you spend on something that doesn’t lead to a better life is a dollar wasted.

There’s one final note I want to make here about the prisoner’s dilemma: it applies very strongly to human relationships.

So often, when we interact with others, we’re afraid to take the risk. We would rather have a small upside (or no upside at all) as long as it comes with a small downside. When we see that interesting person across the room, it’s often easier just to say nothing at all (betray, in other words) than to approach that person (ally). When we see someone that needs help, it’s easier to turn the other cheek (betray) than help (ally).

Most of the time, being the “ally” and actually interacting with someone is the path that offers at least a chance of reward, but it also offers the chance of rejection. That’s how it seems, anyway.

The truth is that not approaching at all usually amounts to the same conclusion as rejection. If you get rejected, you simply don’t build a relationship, but if you don’t approach, you don’t build a relationship, either.

The prisoner’s dilemma is a very powerful way to look at the decisions you make in your life. Whenever you try to look at any decision through a new light like this, you often end up seeing things very differently and, often, you end up making different – and better – decisions.

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