Book Review - Prisoner's Dilemma

What links the H-bomb, playing chicken and the Cuban missile crisis to game theory?

The answer, according to William Poundstone, is the famous game called the prisoner's dilemma (see here for a fun example). His 1992 book Prisoner's Dilemma is not recent (I was a toddler back then) but is still both fascinating and relevant.

Poundstone's approach is to carefully weave together a biography of John von Neumann and a potted history of the nuclear arms race with examples of fun games. The end result is an utterly gripping read (between you and me I read it in lectures) that never fails to surprise (whether you be an economist or normal).

So as not to ruin the book I'll only share one example of H-bomb game theory...

First, read this fun example of a brilliant game to play with your friends.

Now, the 'Dollar Game' is special because it induces buyers regret. Those who bid inevitably wish they hadn't! There is a rapid escalation. Before we know it, both bidders are wishing they were back where they started. But they always have an incentive to go one higher. They do not want to be left in second place. This is not dissimilar to the nuclear arms race.

The analogy starts with America building the A-bomb at the end of WWII. Understandably, Russia could not contemplate being out gunned so they got one. So the USA understandably got more A-bombs. So did the USSR. So America built the H-bomb. So Russia did too. And so on. The starting position led to escalation and both states ended up in a worse position than at the start when neither had any nuclear bombs: They had spent a lot of money on no tactical advantage. If they had coordinated they could have stopped at some point (i.e. just having one A-bomb each). Sadly for both nations this was never likely to happen.

In fact, the more Poundstone delves into the cold war the more analogies crop up. Coincidently (or not) the people who originally created game theory, such as John von Neumann, also created the bomb.

I highly recommend you read Prisoner's Dilemma so that (if nothing else) you can start to see real life conundrums through game theory spectacles, and what spectacles!

Genre: Economics/Behavioural Economics
Accessibility: 10/10
Accuracy: 9/10
Readability: 9/10
Usefulness: 7/10
Verdict: Very, very interesting!

Late To The Football - Three Lions '98

As I sat waiting for my friends in a Guildford pub, I recalled many a similar experience of my youth. For years we played football every Saturday afternoon, but we had a serious problem with punctuality.

Every week we would agree to meet at 2pm on the park, but every week people would turn up slightly later than the week before. With hindsight I can see that this was a classic case of coordination failure, with a hint of the free-rider problem. Let me explain...

Us in our heyday

There was no intrinsic problem with 2pm (it wasn't as if it was too early for us to get up). The problem was that there was a disincentive to being the first one to arrive. Waiting on your own for everyone else to turn up is not especially fun. There was an incentive to turn up just after everyone else. Turning up at the same time would have been fine, but you'd have to wait for them to put their boots on (but you didn't want to come too late or you'd miss valuable footy time).

Thus if you suspected other people would show up at 2:00pm, your optimal strategy would be to turn up at 2:01pm. Because you turned up at 2:01pm this week, the others might arrive at 2:02pm next week. Thus you can see how things quickly got out of hand. Compounding this was the teenage tendency to be late anyway, and every time you were accidentally late you would give an incentive for your mates to be later the following Saturday.

Even though it was explicitly stated each week that we would start at 2pm, by the time we were in 6th Form kick-off was usually 2:45pm or later. Occasionally there would be a punctuality push and it would be announced that we'd all turn up and start at exactly 2pm - but this only brought things back to about 2:15pm!

Stoke Park (empty)

Economists call this coordination failure. The optimal solution for society would have been all of us turning up at 2:00pm, but individual incentives meant that we failed to coordinate effectively. The only way to mitigate this would have been to create a disincentive to turning up late, but creating and implementing this would have been hard given we were just a group of football-loving mates. The free-riding was insurmountable. Coordination failure is one reason why economists sometimes advocate government intervention - if there had been a higher power somehow encouraging us to turn up on time then we could have solved the problem.


Recommended listening:
Three Lions '98 by Baddiel, Skinner, Lightning Seeds