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HARVEY S. JAMES. USING THE PRISONER'S DILEMMA TO TEACH BUSINESS. ETHICS WHEN PERSONAL AND GROUP INTERESTS CONFLICT⋆.
HARVEY S. JAMES

USING THE PRISONER’S DILEMMA TO TEACH BUSINESS ETHICS WHEN PERSONAL AND GROUP INTERESTS CONFLICT ? (Accepted 13 June 1998)

ABSTRACT. This paper shows how the Prisoner’s Dilemma can help students recognize and understand the ethical ramifications of decisions they make. The advantage of studying the Prisoner’s Dilemma is that it models situations in which there is a conflict between the interests of individuals and the well-being of the group. Accordingly, it provides an effective framework for illustrating the importance of ethical decision-making by managers in a business and social environment. The paper describes two classroom activities that characterize the Prisoner’s Dilemma and draws two important principles for the teaching of business ethics. The two principles are the implication effect and the self-defeating behavior effect. The paper also suggests several discussion points based on the two classroom activities and the two principles.

1. INTRODUCTION

A common objective of ethics training in business schools is to help students recognize the ethical ramifications of the decisions they make, particularly when their self-interest conflicts with moral principles. This is not an easy lesson to teach. “Why should a business person be moral?” is a telling question, especially when it appears that many individuals have no concern for ethically correct behavior and that crime sometimes pays. Indeed, many students struggle to understand how unethical behavior can be not only harmful to others but also self-defeating when the immediate personal gains seem substantial. The purpose of this article is to show how the Prisoner’s Dilemma can be used to teach the importance of ethical behavior in situations characterized by a tension between individual and group interests. The Prisoner’s Dilemma is effective because it models situations in which individual incentives and group incentives pull in opposite directions. The Prisoner’s Dilemma is a popular analytical tool in economics and social psychology because the behavior of participants playing the game reflects the patterns of behavior observed under many different “real-world” circumstances ? I am grateful to Farhad Rassekh and two anonymous referees for helpful comments

and suggestions. Teaching Business Ethics 2: 211–222, 1998. © 1998 Kluwer Academic Publishers. Printed in the Netherlands.

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when individual and collective interests appear to conflict (Axelrod, 1980; Rapaport, 1987). For instance, the Prisoner’s Dilemma is useful in examining military strategy, arms races, trade policy, price wars, tort reform, and management-union negotiations (see Dixit and Nalebuff, 1991). Scholars examining the Prisoner’s Dilemma typically focus on descriptive models outlining how individuals faced with a Prisoner’s Dilemma situation actually behave (Rapaport, 1987). The descriptive analyses are based on the assumptions that individuals are rational, self-interested, and informed and that they know that the other participants are rational, selfinterested, and informed. The strategies of play offered by descriptive analyses of the Prisoner’s Dilemma suggest that participants will pursue their own individually-optimal strategies at the expense of outcomes that benefit the participants collectively. Because of this expected outcome, many business ethicists argue that the Prisoner’s Dilemma is not an appropriate model of business and thus should not be used in the teaching of business ethics. One of the most vocal critics is Solomon (1992), who maintains that the Prisoner’s Dilemma presents a “gloomy” and “degrading” picture of the business world because of its prediction that participants will choose to forgo mutually-beneficial exchanges that come from cooperation by pursuing individually rational objectives that may involve some form of deceptive practice. An objective of this article is to show that the Prisoner’s Dilemma is effective in teaching business ethics precisely because of this criticism. Indeed, how individuals deal with conflicts of interest, especially when individual interests conflict with their duties to others, is at the heart of what ethical theory is expected to resolve. Accordingly, ethical lessons can be learned by examining normative prescriptions of how the Prisoner’s Dilemma should be played rather than by relying on descriptive theories of how the Prisoner’s Dilemma is played. The basic insight offered by an examination of the Prisoner’s Dilemma is that individual obligations to consider the social welfare of the group require decision-makers to rise above their narrow self-interests. The application to business ethics is therefore obvious. Ethical business leaders consider the ethical ramifications of the decisions they make, which may require them to forgo potentially profitable projects if such projects are expected to violate socially-desirable objectives. By focusing on the implications of self-interested behavior in the context of the Prisoner’s Dilemma, business ethicists can illustrate how business decisions affect others and decision-makers and how one’s environment affects the incentives people face to cooperate with or take advantage of others. Using the Prisoner’s Dilemma to illustrate the virtues of cooperation and moral behavior is not unknown to business ethics. A sample of authors

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TABLE I Sample Matrix Representation of the Prisoner’s Dilemma Column Player (C)

Row Player (R)

Cooperate Defect

Cooperate $3, $3 $5, $0

Defect $0, $5 $1, $1

employing analyses of the Prisoner’s Dilemma in ethical contexts include Arrow (1997, p. 125), Bowie and Duska (1990, pp. 27–28), and Boatright (1997, pp. 95–96). In these writings the authors show how certain ethical situations can be characterized and explained by the Prisoner’s Dilemma. Hanson (1991) describes how incentives created by some organizational structures result in Prisoner’s Dilemma situations. Hanson also explains how managers can promote ethical conduct by incorporating insights learned from studies attempting to find “solutions” to the Prisoner’ Dilemma, such as those derived from computer simulations administered by Axelrod (1980, 1984). Noreen (1988) uses the Prisoner’s Dilemma, and Miller (1992) uses a variation of the Prisoner’s Dilemma called the “trusthonor” game that was originally introduced by Kreps (1990), to explain how behavioral norms and ethical rules can evolve over time that restrain participants from pursuing opportunistic actions. The contribution of this paper is to explain how the Prisoner’s Dilemma can aid in the teaching of business ethics in the classroom. This article will first describe the basic features of the Prisoner’s Dilemma and show how the game can be used to characterize ethical and unethical behavior in situations in which individual and group interests conflict. The paper will then describe two classroom exercises based on the Prisoner’s Dilemma. The exercises illustrate important implications for ethical decision-making and provide an effective and entertaining means of teaching students the importance of ethical conduct in business.

2. THE PRISONER’S DILEMMA

In its simplest form, the Prisoner’s Dilemma is represented as a 2 × 2 matrix (see Table I). The Prisoner’s Dilemma can easily be extended to more than two players if necessary, although it will not be possible to represent the game in the form of a table. In the simple case, there are two decision-makers, one playing Rows (player R) and the other playing

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Columns (player C). Each player is responsible for choosing between two different courses of action, such as Cooperate or Defect, which the players select simultaneously. In principle, any two opposing options will work, but generally the choices should reflect a measure of cooperation and noncooperation. For each combination of choices made by the two players, the payoffs received are indicated in the cells of the matrix. In Table I, the first number in each cell represents the reward to player R, while the second number represents the payoff to player C. A typical descriptive analysis of the Prisoner’s Dilemma proceeds as follows: Suppose player C decides on option Cooperate. If player R chooses Cooperate, he receives $3; however, if he chooses Defect, he receives $5. Given that player C is cooperating, it is in the interest of player R to defect, since defection results in a greater payoff than cooperation. Suppose player C chooses Defect. If player R selects Cooperate, he receives $0, but it he chooses Defect, he earns $1. Given that player C is defecting, it is in the interest of player R to defect, since defection results in the greater payoff than cooperation. In fact, it is always in player R’s self-interest to defect, since defection results in a greater individual payoff than cooperation regardless of the strategy chosen by player C. We can easily make the same argument about player C’s incentive to defect. Player C always has an incentive to defect, regardless of how player R plays, since defection by player C results in a higher payoff than cooperation. Consequently, each players receives $1 as a result of mutual defection. The value of examining the Prisoner’s Dilemma comes not in the descriptive result in which both players choose to defect. Rather, what makes the Prisoner’s Dilemma of interest to ethicists is the normative analysis of how the players should act and what the consequences are to them of not cooperating with each other. In the context of the Prisoner’s Dilemma, cooperation may be associated with ethical behavior, while defection may represent unethical conduct. The insight offered by an analysis of the Prisoner’s Dilemma is that an adherence to ethical principles will result in greater group and individual rewards, but only if the players forgo the individual incentive to take advantage of each other through unethical actions. The Prisoner’s Dilemma shows in straightforward terms the consequences to the individual and group of pursuing ethical (cooperative) and unethical (defective) actions. 3. THE PRISONER’S DILEMMA IN THE CLASSROOM

The following two activities embody the basic characteristics of the Prisoner’s Dilemma and are useful in framing a discussion of ethics in the

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classroom because they require the participation of students. That is, instead of hearing about the importance of ethical conduct, students are able to see, based on their own actions, the implications of their behavior and the relevance of ethics in decision-making, particularly in situations in which there are conflicts between the interests of individuals and the group. The two activities are the Grab Game and the Voting Game. 3.1. The Grab Game For this activity you will need a large bowl, such as a salad bowl, and a supply of M&Ms or some other candy or object that is relatively easy for students to grab in quantities. (I have used paper clips in my classes, with each paper clip representing a certain amount of extra credit.) The basic idea is that whatever is placed in the bowl, it has to represent something the players will want, and the objects have to be relatively easy to “grab.” For illustrative purposes, suppose that students are to grab M&Ms. Select four to eight students, or have several students volunteer. The actual number is not important. Instruct the volunteers that their objective is to get as many M&Ms as possible because they will be allowed to eat whatever quantity they get. They get M&Ms by taking them from the bowl. Point out that M&Ms taken by one participant are obviously not available for the other participants to take. Also, if someone reaches for and touches an M&M, they must take that M&M. State that you will begin by placing five M&Ms in the bowl. State also that you will double the number of M&Ms in the bowl approximately every 10 seconds. If the number of M&Ms in the bowl drops below five then you stop the activity. Place five M&Ms in the bowl, and tell participants to begin. Generally, participants will immediately grab for the M&Ms. If they do, then the game ends. Sometimes the group will wait, but inevitably someone will make a move to get a handful of M&Ms from the bowl, which causes others to grab for the M&Ms and ends the activity if the number in the bowl falls below five. Note how the game is structured: If the participants “cooperate” in the sense that they wait for M&Ms to double every 10 seconds, in theory they can have a tremendous quantity of candy to eat. So, the incentive from the group’s perspective is to wait before grabbing. However, from the individual’s perspective, the incentive is to “defect” by grabbing M&Ms immediately. The reason is that individuals may not know when others will grab, and M&Ms removed by one participant cannot be eaten by another. After the game ends ask the participants why they started grabbing or why they waited, depending on what happened. Make the connection among waiting, cooperating, and acting ethically. The idea is that waiting is

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TABLE II Payoffs to Individuals Voting Either 0 or 1 in the “Voting Game” Number of Zeros

You vote 0

You vote 1

0 1 2 3 4 5 6 7 8 9 10 etc.

— 2 4 6 8 10 12 14 16 18 20 etc.

8 10 12 14 16 18 20 22 24 26 28 etc.

form of cooperation by members of the group and can represents “ethical” behavior. Defection by grabbing M&Ms, especially early in the game, can represents “unethical” behavior, since individuals knowingly gain at the expense of others within the group. Point out that the group, and thus individuals within the group, could have been significantly better off by waiting (especially if the activity ends relatively quickly). Comment that the dilemma arises because the self-interest of individuals (to take M&Ms early rather than to wait as a group) conflicts with the interests of the group (to wait for the M&Ms to double and double and double again). Suggest that in order to understand the nature of that conflict one must study ethics. Indeed, an important part of ethical training involves learning how our individual actions affect others, especially when there is a “conflict” between the interests of the individual and the interests of society. 3.2. The Voting Game Begin by passing out a small card to each student in the classroom, such as a 3 × 5 index card. Instruct each person to write their name at the top of the card. Tell them that they will be asked to “vote” by either writing the number 0 or the number 1 on the card. The voting is to be done secretly so that neighbors do not know what neighbors are writing. State that after everyone has voted by writing either 0 or 1 on the card, you will collect the cards and count the number of ZEROs.

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Voters will get a “payout” according to what they voted and how many students voted 0. The payouts received by each voter, according to their vote of 0 or 1, are given in Table II. Continue the table until the number of zeros equals the number of participants, since in theory everyone may vote 0. You may make the table available to the students before they cast their vote. The payouts can represent numbers of M&Ms, pennies, dollars, or hypothetical dollars amounts. If you have a large number of students so that it is not feasible to give everyone a prize, then use hypothetical dollars and tell the participants to “pretend” they will get the dollar amount in the form of a cash payment. In this case, it may be more effective to multiply the payouts in the table by $1,000 to make these large hypothetical payouts. Note the nature of the payoffs in the table. Each person who votes 1 receives a larger payout than received by students who vote 0. Moreover, the more people who vote 0, the higher everyone’s payout will be. Collect the cards and count the number of ZEROs voted by the group. Then, announce the reward each voter earns, based on their vote and the total number of ZEROs voted by the group, as indicated in the table. For instance, if 9 students voted 0 and one student voted 1, then explain that the nine who voted 0 earn 18, while the student who voted 1 receives 26. Because this activity is based on the Prisoner’s Dilemma, its structure and the implications for behavior are virtually the same as the Grab Game. Individually, each person has an incentive to vote 1, but each person also hopes that everyone else in the group votes 0. This represents a conflict between the interests of the individual and the interests of the group, which is a classic framework for ethical considerations. For illustrative purposes, suppose that there are 10 participants. Suppose that nine vote 0 and one votes 1. Those who voted 0 will get 18, while the person who voted 1 will get 26. If everyone had voted 0, each would have received 20. So, the person who voted 1 earned an extra 6, but cost each of the other nine participants 2, for a total group cost of 18. (Each of the other nine received 18 rather than 20, for a difference of 2, and there are nine participants who lost that extra 2, for a total group loss of 18 to the group). Notice also that the individual who voted 1 wanted to get 8 more than everyone else, but really got an extra 6. (Instead of receiving 20 by voting 0, the person who voted 1 received 26, for a net “gain” of 6). To facilitate discussion, point out that cooperating with the group by voting 0 can be considered “ethical” behavior, while voting 1 to gain individually at the expense of the group can be considered “unethical” behavior. Explain how those who voted 1 “cost” those who voted 0, and suggest that everyone’s payout could have been greater if everyone had voted 0. This point is particularly evident if those who voted 1 received a

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lower payout than they could have received had everyone voted 0 (a typical outcome of this activity, in fact).

4. LESSONS TO BE LEARNED FROM AN ANALYSIS OF THE

PRISONER’S DILEMMA There are two important points that can be drawn from an analysis of the Prisoner’s Dilemma in general and the two classroom exercises in particular. These are the Implication Effect and the Self-defeating Behavior Effect. 4.1. There Are Implications to One’s Actions The Prisoner’s Dilemma illustrates in simple terms how one’s behavior affects others, which may be called the Implication Effect. Specifically, unethical behavior, which in the context of the Prisoner’s Dilemma game is Defect, harms others in the sense that they are made worse off by the unethical conduct of some individual. That is, by choosing to defect, a player imposes real “costs” on the other players. For instance, consider again Table I. If player C is cooperating and player R chooses to defect, then player C will get $0 instead of $3. Thus, player R’s decision to defect cost player C $3. Similarly, if player C is defecting and player R chooses to defect, then player C will get $1 instead of $5, resulting in a cost of $4. The implication effect is also illustrated by the Grab Game and Voting Game. In the case of the Grab Game, individuals affect the number of rewards earned by the group by how long they wait to grab. Grabbing early reduces the rewards earned by the others in the group, while waiting to grab increases the potential rewards to others. This effect is also illustrated in the Voting Game. By voting 1 rather than 0, the voter adversely affects the other players, while voting 0 increases the payoffs received by others. This is an important insight about ethics that is often hard for students to recognize and understand. Thinking and acting ethically involves a realization of how our actions affect others, especially when there is a conflict between our immediate personal interest and the interest of others, because unethical behavior adversely affects others. Moreover, the “implication” effect as illustrated by the Prisoner’s Dilemma has a connection to both deontological and teleological perspectives. You can make the point that because unethical behavior harms others, decision-makers have a duty not to take actions that impose costs on others and that the social costs of

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unethical decisions by some individuals can be large relative to the gain received by the unethical decision-maker. 4.2. Unethical Behavior is Ultimately Self-defeating It should be readily apparent from an examination of Table I that when both players choose to defect they each end up with a payoff that is inferior to the reward they could have receive if they had cooperated. This may be referred to as the Self-defeating Behavior Effect. Even though defection is individually optimal, it is not in the collective interest of the players to defect. If each player forgoes his individual interest by selecting Cooperate rather than Defect, they each will receive a greater payout than they would earn by mutually defecting. Moreover, since the players are aware of the payoff matrix they can observe the fact that they will be better off by cooperating. In other words, the Prisoner’s Dilemma illustrates the important point that unethical behavior is often self-defeating because it produces an outcome that everyone agrees is individually and collectively inferior to that realized under ethical or cooperative behavior. The self-defeating effect of unethical conduct is also illustrated by in the Grab Game and Voting Game. In the Grab Game, defection by individual players reduces the reward earned not only by others but also by the persons grabbing, since players give up opportunities of receiving higher payouts in the future by grabbing early. Similarly, in the Voting Game, defection is self-defeating since the reward earned by those who vote 1 are lowered by the very process of voting 1. In addition, the payout received by voting 1 will often be less than the payout participants could have received if each had voted 0. For instance, suppose there are 10 participants, and five vote 1 while five vote 0. The payout earned by those who voted 1 is 18. But notice that if they had voted 0, so that the total number of zeros is 10, then the payout received by everyone will be 20, which is greater than 18. (Because those who vote 1 get 8 more than those who vote 0 and the payouts in the table move in increments of 2, then you will need more than 8 ÷ 2 = 4 players who vote 1 to experience “self-defeating behavior.”) The point is that unethical behavior, while apparently rewarding to the individual (the “unethical” person does relatively better than the ethical players), is ultimately self-defeating because of the feedback effect such behavior has on the individual. Unethical conduct not only harms the group, but it also adversely affects the individual engaged in the questionable activity.

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5. DISCUSSIONS POINTS DERIVED FROM THE PRISONER’S

DILEMMA The Prisoner’s Dilemma and the related classroom exercises provide an interesting and effective method of introducing questions and of generating discussions of ethical issues and principles. For instance, the fact that defection in the Prisoner’s Dilemma will adversely affect others as revealed by the Implication Effect and that unethical actions will produce feedback effects that affect the decision-maker as revealed by the Self-defeating Behavior Effect is consistent with the Kantian principles of consistency, reversibility, and universalizability. The idea is that an individual’s behavior may be ethically justified if he or she can will that everyone engages in the same behavior or takes the same action under similar circumstances. Will one participant playing a Prisoner’s Dilemma game want another participant to defect? The obvious answer is “No”, since defection will adversely affect the first player. Consequently, the individual should not choose to defect. Conversely, will one participant playing a Prisoner’s Dilemma game want the other players to cooperate? The answer is “Yes”, since the individual is better off when others cooperate. Accordingly, the individual should cooperate as well. A related set of questions involves the issue of whether individuals have a “duty” to consider how their actions affect others, especially when individual interests conflict with group objectives. Do players have a responsibility to vote 0 so that everyone in the group can be made better off? In general, do individuals have a duty to consider how their actions affect society? What if society is harmed by an individual’s action that make him or her better off? Do individuals have a duty to sacrifice for the sake of others? These questions often illicit a healthy discussion from students who participated in the activities. Another important question is whether it pays to behave unethically. The Prisoner’s Dilemma and related exercises provide a compelling answer. The only reason it pays to behave unethically is because others are ethical. Indeed, the incentive to defect in the Prisoner’s Dilemma is the strongest when other players cooperate. Therefore, crime often pays because most people do not engage in criminal behavior. One can be made better off by stealing, but only if others do not steal (from you). If everyone were a thief then there would be no advantage to stealing, and in fact everyone would agree that no one should steal. A final point of discussion centers around the issue of whether ethical conduct is ultimately a function of individual self-interest or whether other motives dominate. Should you behave ethically because it is in your

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interest to do so, or because it is the right thing to do? The Implication Effect and Self-defeating Behavior Effect illustrated by the Prisoner’s Dilemma suggest that ethical conduct can be motivated by appealing to the self-interest of individual players. In this sense, the ethical analysis, as embodied by an examination of the Prisoner’s Dilemma, parallels rational choice in an uncertain business environment. However, if ethical conduct requires that individuals restrain their self-interest in order to achieve group objectives, then what role does self-interest play in motivating behavior? When is a consideration of self-interest constructive and consistent with ethical conduct, and when is it inconsistent? 6. CONCLUSIONS

Ethical conflicts often arise whenever the interests of individual decisionmakers conflict with the interests of others, especially the group of which the individual decision-makers are a part. One purpose of training in business ethics is to help students recognize the ramifications of their decisions and actions. While class lectures and case studies are useful, students are more likely to realize the importance of ethics in decision-making when they also see, in clear and simple terms, the effects of ethical and unethical conduct. The Prisoner’s Dilemma, and the related exercises described above, provide an effective method of teaching ethics because the effects of one’s actions can be clearly delineated and related to fundamental ethical principles. Of course, the Prisoner’s Dilemma should be not used in the place of presentations of principles of moral reasoning and theories of ethics. But it can be used to motivate students to consider ethical issues. Additional study is required to determine the extent to which the Prisoner’s Dilemma is effective in changing the ethical attitudes and behaviors of students. REFERENCES Arrow, K. J.: 1997, ‘Business Codes and Economic Efficiency’, in T. L. Beauchamp and N. E. Bowie (eds.), Ethical Theory and Business, fifth edition, Prentice-Hall, New Jersey, 124–126. Axelrod, R.: 1980, ‘Effective Choice in the Prisoner’s Dilemma’, Journal of Conflict Resolution 24(1), 3–25. Axelrod, R.: 1984, The Evolution of Cooperation, Basic Books, New York. Boatright, J. R.: 1997, Ethics and the Conduct of Business, second edition, Prentice-Hall, New Jersey. Bowie, N. E., and R. F. Duska: 1990, Business Ethics, second edition, Prentice-Hall, New Jersey.

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Dixit, A. and B. Nalebuff: 1991, Thinking Strategically: The Competitive Edge in Business, Politics, and Everyday Life, W.W. Norton & Company, New York. Hanson, D. P.: 1991, ‘Managing for Ethics: Some Implications of Research on the Prisoner’s Dilemma Game’, S.A.M. Advanced Management Journal 56(1), 16–20. Kreps, D. M.: 1990, ‘Corporate Culture and Economic Theory’, in J. E. Alt and K. A. Shepsle (eds.), Perspectives on Positive Political Economy, Political Economy of Institutions and Decisions series, Cambridge University Press, New York, 90–143. Miller, G.: 1992, ‘Ethics and the New Game Theory’, in N. Bowie and R. E. Freeman, (eds.), Ethics and Agency Theory: An Introduction, Oxford University Press, New York, 117–126. Noreen, E.: 1988, ‘The Economics of Ethics: A New Perspective on Agency Theory’, Accounting, Organizations and Society 13(4), 359–369. Rapaport, A.: 1987, ‘Prisoner’s Dilemma’, in J. Eatwell, M. Milgate, and P. Newman (eds.), The New Palgrave: A Dictionary of Economics, Macmillan Press Limited, London, 973– 976. Solomon, R. C.: 1992, Ethics and Excellence: Cooperation and Integrity in Business, Oxford University Press, New York. Department of Economics (EFIA) University of Hartford 200 Bloomfield Ave. West Hartford, CT 06117 USA [email protected]