Trade War as Prisoner’s Dilemma

A trade war is like a Prisoner’s Dilemma game gone wrong.

• (1) Trust between both sides has eroded.
• (2) They cannot communicate effectively.
• (3) They decide to forego cooperation and defect.
• (4) And, by foregoing cooperation both sides are hurt.

In a prisoner’s dilemma game, two players are separated (can’t communicate) and given two choices: cooperate or defect. The only winning outcome is when both players choose to cooperate. 

There is a special kind of prisoner’s dilemma game, where the game is repeated many times over and the players can remember the other player’s actions. This means past rounds matter, reputation matters. In these prisoner’s dilemma games, a winning strategy emerges: Tit-for-Tat.

How Tit-for-Tat wins Prisoner’s Dilemma games

First off, the Tit-for-Tat strategies that win are slightly modified. They have a function that tries to break a negative ‘defection’ cycle by forgiving the other party and making the first move to cooperate. 

More specifically the winning strategies tend to be: “nice (never the first to defect), retaliating (willing to defect), forgiving (willing to attempt to regain trust by breaking a defection cycle), and non-envious (not specifically attempt to outscore individual opponents)”[1]. I’m going to focus on forgiving because that is where the cycle gets broken.

In a standard Tit-for-Tat strategy you copy the move of your opponent. If they defect : you defect, if they cooperate : you cooperate. This easily turns into a negative cycle, where both sides keep defecting (and spending a lot of extra time in jail).

The negative cycle is broken first by forgiveness and second by extending a hand (attempting cooperation). One side decides to forgive and tries cooperation for two rounds.

Why two rounds? Because the players don’t know the other player’s action until after the round. The first round forgiveness is the signal. The second round is the real chance for cooperation:

• If the other side cooperates, the negative cycle is broken. (Hurrah!)
• If the other side refuses cooperation, in the next round (the third) the forgiving player switches back to escalation. The negative cycle continues.

Here’s some food for thought on forgiveness:

• “记人之善，忘人之过” – 三国志 forget injuries, never forget kindness.
• “We must develop and maintain the capacity to forgive. He who is devoid of the power to forgive is devoid of the power to love. There is some good in the worst of us and some evil in the best of us. When we discover this, we are less prone to hate our enemies.” – Martin Luther King, Jr.
• “To forgive is to set a prisoner free and discover that the prisoner was you.” – Lewis B. Smedes

Forgiveness is the intentional and voluntary process by which a victim undergoes a change in feelings and attitude regarding an offense, lets go of negative emotions such as vengefulness, forswears recompense from or punishment of the offender, however legally or morally justified it might be, and with an increased ability to wish the offender well.

Wikipedia [2]

• [1] https://onlyagame.typepad.com/only_a_game/2007/06/tit_for_tat.html
• [2] http://en.wikipedia.org/wiki/Forgiveness

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