Recently in my economics classes we have been talking at length about the economic theory of "Prisoner's Dilemma." Prisoner's Dilemma uses a combination of psychology and economic theory to asses a situation in which two people (commonly prisoners) can be made better off by working together rather than working individually, but because of psychological decisions, both prisoners chose a strategy that better suits them, thereby, making both prisoners worse off than they would be if they decided to work together. To illustrate this idea here is the following example.
"Two suspects are arrested by the police. The police have insufficient evidence for a conviction, and, having separated both prisoners, visit each of them to offer the same deal. If one testifies (defects from the other) for the prosecution against the other and the other remains silent (cooperates with the other), the betrayer goes free and the silent accomplice receives the full 10 year sentence. If both remain silent, both prisoners are sentenced to only 6 months in jail for a minor charge. If each betrays the other, each receives a 5-year sentence. Each prisoner must choose to betray the other or remain silent. Each one is assured that the other would not know about the betrayal before the end of the investigation."
From this analysis, one might think that both prisoners will choose to remain silent in order to receive only the minor charge and both prisoners are better off. But, assuming that both prisoners are somewhat rational, psychology and economics tells us that both prisoners will choose the strategy at which (on an individual level) each prisoner will be better off. Therefore, the prisoners will both choose to betray the other and both will serve a harsher sentence because of this.
This theory is not only applicable in a prisoner-type scenario. Watch the video I have attached below and see how quickly personal greed takes control of our decision making process. Not only is greed a factor here, but also there is the factor of fear of betrayal. Both prisoners can safely assume that the other is being made a similar deal and does not know which strategy the other will choose. In order to not be completely "screwed" by the other person, the prisoner must choose to betray the other in order to protect one's self. This is a perfect example of how behavioral psychology and economic theory coincide. Watch the video below and pause it at 2:46 and try to guess the outcome. I think you will be pleasantly surprised.
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