Overview
The prisoner's dilemma is the classic model in game theory showing how individually rational choices can produce a bad outcome for the group. Game theory, systematized by von Neumann and Morgenstern in Theory of Games and Economic Behavior (1944), studies decisions in which several actors take each other's choices into account. The dilemma was devised in 1950 by Merrill Flood and Melvin Dresher at the RAND Corporation, and the mathematician Albert Tucker gave it its name by telling it as a story about two prisoners.
The structure in a payoff matrix
Two partners in crime are questioned separately. If both stay silent, each gets a light sentence; if both confess, each gets a medium sentence; if only one confesses, that one goes free and the silent one gets a heavy sentence (the exact sentences are illustrative).
- Whatever the other does, each prisoner gets a lighter sentence by confessing, so confessing is a dominant strategy.
- Mutual confession is a Nash equilibrium, an outcome from which neither can gain by changing their choice alone, the equilibrium concept defined generally by Nash (1950).
- Yet both would be better off staying silent, so the equilibrium is not Pareto optimal.
The structure shows up clearly in decisions where money is at stake, such as price competition between firms. Both make large profits if both keep prices high, but each has an incentive to cut prices to win customers, which often ends in a price war.
Repeated games and tit-for-tat
Defection is rational in a one-shot game, but things change when the same players meet repeatedly. Axelrod (1984) ran computer tournaments among strategies submitted by researchers, and the simple tit-for-tat strategy, cooperate first and then copy the opponent's previous move, scored best. This is covered in more detail in the evolution of cooperation.
Limitations and debate
The model assumes players care only about their own payoff and cannot communicate. In experiments many people cooperate even in one-shot games, and fairness, trust and reputation affect choices. Many real situations involve many players or uncertain payoffs and are analysed with extensions such as public-goods games or the tragedy of the commons.
Uses in business, policy and negotiation
The model is used to explain pricing and advertising competition in oligopolies, why cartels tend to break down, arms races between states and the security dilemma, and problems such as climate negotiations in which everyone gains from cooperation but each has an incentive to free-ride. In business-strategy classes and in consulting or public-sector interviews, a strong answer also proposes mechanisms that sustain cooperation, such as long-term contracts, trust-building and sanctions for violations, which links to negotiation theory.
Sources reviewed: 2026-10-16
References
- von Neumann, J., & Morgenstern, O. (1944). Theory of Games and Economic Behavior. Princeton, NJ: Princeton University Press.
- Nash, J. F. (1950). Equilibrium points in n-person games. Proceedings of the National Academy of Sciences, 36(1), 48–49.
- Axelrod, R. (1984). The Evolution of Cooperation. New York: Basic Books.
- Poundstone, W. (1992). Prisoner's Dilemma. New York: Doubleday.