In an earlier article, we said that some companies might consider taking a free ride, on the back of other companies by letting others fund social initiatives in the hope, if not expectation, that they will also benefit.

In this article, we consider how this decision-making process may operate and how it may be overcome. We do this in the context of something called the Prisoner’s Dilemma.


What is the Prisoner’s Dilemma?

Figure 1: Courtesy of ms.akr, Flickr (

Imagine that two people – let’s call them Andrew (A) and Bob (B) – have been taken into custody. They are separated, so that they cannot communicate with each other.

The police have no witnesses so can only rely on either Andrew or Bob giving evidence against the other. This means that Andrew and Bob face a dilemma. Do they cooperate with the other person, by saying that neither of them was involved in the crime? Or do they betray the other, by saying “it was him, not me”, in the hope of a lighter sentence for himself?

To make their choices very clear, the police give them the following options.
• If they cooperate with each other, by both saying that neither was involved in the crime, they will both be convicted on a lesser charge and go to prison for one year each.
• If one testifies against the other, the person who testifies will go free (zero years in jail) and the convicted person will go to jail for three years.
• If both testify against the other, then both will go to jail for two years each.

The prisoner’s dilemma is usually represented as a table (see Table 1)



Table 1

Before reading on, think about what you would do? Would you cooperate or defect?

The dilemma faced by the prisoners is whether to cooperate (by denying that either of them was involved in the crime) or defect (by agreeing to testify against the other).

The answer is both obvious and subtle. Look at it from the perspective of one of the prisoners – let’s choose A – the analysis is the same if we chose B.

If prisoner B chooses defect, then prisoner A should also defect, as he will then serve 2 years, rather than 3 if he (prisoner A) had cooperated. If prisoner B chooses to cooperate, then prisoner A should defect as he will go free, rather than serving 1 year for mutual cooperation.


This is a Nash Equilibrium, named after the Nobel prize winning mathematician John Nash, who had a film A Beautiful Mind made about his life. A Nash Equilibrium says that you would not change your mind even when you found out what the other person has chosen. This is the case with a defect choice here. When you find out whether your partner chose cooperate or defect, it does not matter, you would not change your choice.

However, the analysis does not end there. There is a better solution. If both prisoners had cooperated, they would only serve a year each, rather than the two years for mutual defection. However, that requires mutual trust. Do you trust the other person enough to cooperate and get a small punishment, or do you look after only yourself (by defecting), which takes away the risk of a large punishment.


The iterated prisoner’s dilemma

What has been described above is a one-shot prisoner’s dilemma. You play once, and you are done; you never play again. The correct choice for a one-shot prisoner’s dilemma is defection.

However, if you play the game repeatedly, the so called “Iterated Prisoner’s Dilemma”, is there a way to arrive at a situation where both sides cooperate? If this can be achieved, and drawing on the above example, each prisoner will serve one year each, which is the best solution for both criminals if you consider the outcome for both prisoners, rather than just looking at it from the point of view of one prisoner. If both criminals cooperate, this provides the lowest average prison term, which is 1 year as opposed to 1.5 years and 2 years for the other combinations of cooperate and defect.

The question that scientists have struggled with for years, is how can mutual cooperation evolve when you play the iterated prisoner’s dilemma, rather than each side taking the more logical defect choice.


What does the iterated prisoner’s dilemma mean in the real world?

The above thought experiment is interesting but does the iterated prisoner’s dilemma have any bearing on the real world? The answer is yes.

Consider nuclear armament. Two sides have a nuclear option, but they cooperate with one another by not launching their war heads. If one side defected, and wiped out the other country, the other country would no longer be a threat and they could save money by not having to maintain a nuclear option. However, the consequences of defecting, make the choice of cooperate the favoured option, especially when you consider that this is not just a one-shot choice as the enemy could rearm, other countries may come to their defence and other countries might develop a nuclear capability in the future.

Oil cartels are another example. The cartel members can keep the prices high by restricting the amount of oil they let into the market. By mutually cooperating, the oil companies all benefit, rather than a single company selling more oil to maxmise its own profits.

Game shows even play the prisoners dilemma. Golden Balls, a UK game show, uses the concept of split (cooperate) and steal (defect) to decide how the prize money is split. Although, not a true prisoner’s dilemma in the formal mathematical sense, it does demonstrate the concept via the medium of television. Take a look at the clip below (from 42’ 46”) which shows the finale of the game show where the contestants are deciding how to split the prize fund of GBP 26,370, with the risk that they could both leave with nothing.

After watching the clip, you should be able to see why the logical (though perhaps not moral) decision is to steal.

There are many other examples we could give, drawing from areas such as competitive scenarios in business, opening new supermarkets and managing advertising budgets.


What has this to do with Social Capitalism?

In our previous article we used the idea of the Social Capitalism Cycle to describe social capitalism.

We suggested that capitalists generate profit, some of which is then used to invest back into society and impact lives (See Figure 1).


Figure 1: The Social Capitalism Cycle

The parts of the cycle, highlighted in red, are those that are open to exploitation by those wishing to defect. The temptation would be that other companies invest back into society, thus impacting lives. Th disposal income that is generated would then be used to generate revenue in the defectors businesses, as well as those businesses that invested part of their profits in helping society.

If businesses only existed for a single year, then the rational (though perhaps not moral) decision would be not to invest any profit for the good of society. This is the same as Andrew and Bob, the prisoner’s, having to make a single decision whether to cooperate of defect.

However, running a business lasts more than a single financial year, so we are playing an Iterated Prisoner’s Dilemma and there should be a way to arrive at mutual cooperation, where all companies invest for the benefit of society and all the companies benefit as a result of that action.

A company that defects have the ability to make more profit than a company that cooperates, as it invests some of those profits back into the community. Moreover, the company that defects may also benefit as the disposable income that is generated may be spent on the products/services that the company is involved with.

However, like the Iterated Prisoner’s Dilemma, if both companies cooperate, then even more profit may be realised. This not only generates more profit for each company, but also creates more disposable income, which reinforces the overall cycle.

The question is, as it is in the Iterated Prisoner’s Dilemma, is how do you arrive at a position where every company utilises part of its profit for the good of humanity? In fact, it is more difficult than the Iterated Prisoner’s Dilemma as that only involves two players, whereas this real world scenario involves thousands, if not millions, of companies.

There is no magic answer to ensure that all companies cooperate. That will require much thought, encouragement, public relations and, perhaps, even naming and shaming.

But imagine the society we could have, if every company invested part of its profits into initiatives that helped those less fortunate than ourselves and the average quality of life was gradually raised for all humankind.

In an article such as this, we can only scratch the surface of this hugely complex and, some might argue, controversial, subject. We hope that we have provided enough information so that you know what we mean by the term Social capitalism.

There is more information about Social Capitalism in the first issue of the Sekhar Institute journal.

We know that there will be different opinions and we look forward to that discussion/debate.