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However, if both participants in the game operate under the philosophy of "Minimize the total jail time served by both parties", the rational response is to never cooperate.

yes you're right. that is why it is called the prisoner's dilemma. but that is the point. the prisoner's don't cooperate together, the marginal utility function tends to be relative to the other partner. that is why the police always separate their prisoners and interrogate them individually. there is just a huge body of evidence out there that suggests that most probable solution to the prisoner's dilemma is to always defect. and interestingly enough, in a re-iterated prisoners dilemma, the optimum strategy is "tit for tat" (see Axelrod, Univ. of Michigan).

on wall street this paradox particularly holds true among the hedge funds and trading desks where competition tends to be high. even within a firm competition is often nasty and brutish. the goal is to outperform everyone else and in my experience there is very little cooperation among participants.

tr
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