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Prisoner’s Dilemma in a Competitive Economy

Competing entities in a capitalist economy under pressure can give rise to behavior akin to the prisoner’s dilemma. No instance of a capitalist economy under pressure has been more documented than the financial crisis of 2008. At this time Morgan Stanley and Goldman Sachs were at a stand-off after their respective valuations had plummeted. Both companies firmly stuck to their story that their was no reason to sell out to retail banks. As large investment banks and direct competitors, neither wanted to sell themselves first. However, the market had put enough pressure on them that their executives needed to decide between selling  out and dying as a corporation. Furthermore, the stand-off was so critical that if one firm gave in to the market first, the other would almost definitely be stuck in dire financial straits.

This situation can be modeled as a symmetric prisoner’s dilemma game where the players are Morgan Stanley and Goldman Sachs and the strategies are holding out (pleading innocence) and selling (confessing).  In this context, their separation is stipulated by the financially critical scenario where the appropriate strategy in both cases is selling out, but if one sells out first, then the other’s valuation would plummet further. The only Nash Equlibrium in this game would be for both companies to sell out at exactly the same time. They would both absorb the financial shock, albeit to a lesser degree.

Sources:

http://www.telegraph.co.uk/finance/breakingviewscom/2989330/Goldman-and-Morgan-Stanley-trapped-in-prisoners-dilemma.html

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