When incentives reward betrayal, cooperation fails
Two criminals are arrested. The police lack evidence to convict either one on the main charge, but they can convict both on a lesser charge. The police offer each prisoner a deal:
If you betray your partner (testify against them) and they stay silent: You go free, they get 10 years.
If you both betray each other: You each get 5 years.
If you both stay silent: You each get 1 year (on the lesser charge).
The rational choice for each individual is to betray, no matter what the other does. But if both follow this logic, they both get 5 years. If they could trust each other to cooperate, they'd each only get 1 year.
When individual incentives conflict with collective benefit, cooperation breaks down. This isn't a moral failing; it's rational behavior under perverse incentives. Systems that rely on trust collapse when betrayal is rewarded.
The Prisoner's Dilemma isn't just a thought experiment. It describes countless real-world failures:
Banking crises: Every bank knows that if all banks lend conservatively, the system is stable.
But any single bank can profit by taking more risk until everyone does, causing collapse.
Environmental degradation: Factories know pollution hurts everyone. But the factory that pollutes
less loses competitive advantage. So everyone pollutes.
Currency debasement: Governments know inflation hurts citizens. But the government that
prints money first gets the benefit. So all governments print, and all currencies degrade.
"Just trust everyone to do the right thing" isn't a solution; it's wishful thinking. When betrayal is profitable and unpunished, betrayal becomes inevitable. You can't build durable systems on voluntary cooperation when incentives reward defection.
You're playing against a rational opponent. Each round, you choose: cooperate or betray. See what happens when both players pursue their own self-interest.
| Opponent Cooperates | Opponent Betrays | |
|---|---|---|
| You Cooperate | You: +3 Opponent: +3 | You: 0 Opponent: +5 |
| You Betray | You: +5 Opponent: 0 | You: +1 Opponent: +1 |
The rational strategy is to always betray; it gives you a better outcome regardless of what your opponent does. But when both players follow this logic, both end up worse off than if they'd cooperated. An ideal system would solve this by removing the need for trust: rules enforced automatically would make cooperation the only viable strategy.
An ideal system wouldn't ask participants to "be good." It wouldn't rely on trust or voluntary cooperation. Instead, it would change the incentives so that following the rules is the most profitable strategy.
If someone tried to cheat (submit invalid work, break the rules), the system would reject their effort automatically. They'd waste resources and earn nothing. But if they play by the rules, they'd be rewarded.
This would transform the coordination problem into a solved game: cooperation becomes the Nash equilibrium. You can't do better by defecting, so everyone cooperates: not out of altruism, but rational self-interest.
Such a system wouldn't eliminate selfish behavior; it would harness it. By aligning individual profit with collective benefit, you could turn the Prisoner's Dilemma on its head. The rational choice becomes cooperation, because cheating is automatically punished and honesty is automatically rewarded.
Later in this path: You'll discover that this theoretical system actually exists.
Test your understanding with interactive reflections.
Select conditions that enable cooperation: