Friday, February 28, 2014

Cooperation theory: why we can trust strangers

Suppose you’re buying something on eBay. How can you trust someone you’ve never met and are only likely to deal with once? How do you know they won't take your money and run?
eBay realized that sharing historical information in the form of reputation solved the problem. Sellers know that failing to deliver what was promised will compromise their future orders. A good reputation means trusting buyers and encourages the seller to maintain their positive reputation.
On the other hand, the Nigerian prince who needs help getting his inheritance out of the country doesn't have that eBay reputation to back him up, which means you have less incentive to cooperate.
In the prisoners dilemma games two players can either cooperate or defect. Two strategies are noteworthy: tit-for-tat and grim trigger. Tit-for-tat just does what their opponent did last turn. Grim trigger strategies never forgive once they’ve been defected.
Although these are both ‘nice’ strategies in that they do not defect first, tit-for-tat does well even though it can never do better than its opponent. The grim trigger strategy, on the other hand, leads to miserable outcomes for both sides, because its only asset is permanent retaliation. You never cooperate again.
In situations where there is noise or imperfect communication, any perceived slight can trigger the permanent defection and leave no avenue for cooperation.
Tit for tat is better than grim trigger just like forgiveness is better than punishment.
Another factor in cooperation theory that can affect the outcome is the role of hostages. Why cooperate with a hostage-taker? Because you value the hostages.
During the cold war, the entire populations of the US and the USSR were effectively hostages of the other country. Our incentive to negotiate was pretty strong, because the alternative was severe.
More typical 'hostage' situations exist, for example, in mortgage situations, where the bank gets your house if you don't pay them back. It creates incentives for people to pay back the money when they otherwise might have an incentive not to.
Don't get stepped on. Cooperation strategies that let the other player get too far ahead don't do very well either. Cooperation needs to work for both sides to be truly effective and sustainable. Look for fair deals.

The world is not a zero sum game. If you treat it that way, opportunities to cooperate disappear. Tolerate the successes of others, but don't compare yourself to them. Instead compare yourself to what someone else in your position could do. Cooperate, but don't get stepped on.

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