ECONOMICS, ETHICS AND THE DILEMMA IN THE PRISONER’S DILEMMAS by Daniel G. Arce* Abstract This paper contrasts four distinct versions of the Prisoner’s Dilemma (the commons, public goods, biological altruism, and biological selfishness) in terms of their ethical content for economic decision making. An argument is made for the restoration of Tucker’s third player À as given in the original specification of the game À in order to judge whether a resolution is desirable in economic and business situations that reduce to the Prisoner’s Dilemma. Finally, the use of tit-for-tat as a ‘solution’ to the Prisoner’s Dilemma is compared with the practice of business ethics. Keywords: Game Theory, Prisoner’s dilemma, Business ethics, Altruism, Tit-for-tat I. Introduction In their bestseller Freakonomics, Levitt and Dubner (2005, 13) argue that morality represents the way that people would like the world to work, whereas economics represents how it actually does work (emphasis in original). If this is the case, then what are economics students to make of the Pris- oner’s Dilemma (hereafter, PD); where the rational choice of strategy by both players collectively leads to an outcome that is suboptimal for both (Rapoport and Chammah 1965). By contrast, it is well-documented in PD experiments that partici- pants often achieve the collectively desirable out- come, even when complete strangers are matched to play the game once. 1 In this case, economics (theory) appears to be at odds with the way that the world works. Similarly, Arce (2004), Eriksson (2005) and Northrop (2000) argue that the absence of ethical content in textbooks on managerial, environmental and introductory economics, respectively, severely limits the applicability of the economic paradigm for its intended audience. In other words, ethical awareness augments economic analysis by broaden- ing the scope of relevant tradeoffs involved in indi- vidual decision making. Similarly, Frank (2004) and Rubinstein (2006) find that moral variables that typically go unaccounted for in economic models of strategic choice and profit maximization actually do figure into the decision-making calculus of subjects faced with solving these problems. Indeed, these latter two studies are representative of a nascent strand of self-reflective literature within the eco- nomics profession that is focused on the differences between ethical behavior of those who have been exposed to economics and those who have not. The PD is ubiquitous in economics, manage- ment and the social sciences because of its use as a multipurpose tool for examining the dichotomy between the pursuit of individual self interest and acting in the interest of a group at a cost to oneself. Given the prevalence of the PD as a tool for exam- ining behavior in myriad situations of economic and business decision making, it is not surprising that it has become increasingly used as a test of moral decision making. For example, Campbell (2004) finds the PD useful for highlighting con- cerns of responsibility and cooperation in decision making, and whether or not people are ‘hard wired’ to behave ethically. Stodder (1998) makes an appeal to classroom PD experimentalists, ask- ing that they not assume a lack of understanding or denigrate subjects that make arguments/exhibit be- havior consistent with ethical commitment beyond self-interest. Frank (2004) finds that economics students are less prone to “cooperate” in PD ex- periments than are students in other (non-business) * Professor of Economics and Program Head, School of Economic, Political and Policy Sciences, University of Texas at Dallas, GR31, 800 W. Campbell Rd, Richardson, TX 75080, 972-993-6857, darce@utdallas.edu Vol. 55, No. 1 (Spring 2010) 49