For decades, economists have been obsessed with the idea of “enlightened self-interest,” building elaborate models based on the assumption that people make rational choices. Business and political leaders have used these models to shape competitive strategies, compensation, tax policies and social services among other things.
It’s clear that the real world is far more complex than that. Consider the prisoner’s dilemma, a famous thought experiment in which individuals acting in their self-interest make everyone worse off. In a wide array of real world and experimental contexts, people will cooperate for the greater good rather than pursue pure self-interest.
We are wired to cooperate as well as to compete. Identity and dignity will guide our actions even more than the prospect for loss or gain. While business schools have trained generations of managers to assume that they can optimize results by designing incentives, the truth is that leaders that can forge a sense of shared identity and purpose have the advantage.
Overcoming The Prisoner’s Dilemma
John von Neumann was a frustrated poker player. Despite having one of the best mathematical minds in history that could probably calculate the odds better than anyone on earth, he couldn’t tell whether other players were bluffing or not. It was his failure at poker that led him to create game theory, which calculates the strategies of other players.
As the field developed, it was expanded to include cooperative games in which players could choose to collaborate and even form coalitions with each other. That led researchers at RAND to create the prisoner’s dilemma, in which two suspects are being interrogated separately and each offered a reduced sentence to confess.
Here’s how it works: If both prisoners cooperate with each other and neither confesses, they each get one year in prison on a lesser charge. If one confesses, he gets off scot-free, while his partner gets 5 years. If they both rat each other out, then they get three years each — collectively the worst outcome of…