Don and Susanne have both been accused of insider trading. Don knows that if he confesses while Susanne keeps silent, he will receive a 1-month jail sentence. He also knows that if Susanne confesses and he keeps silent, he will receive a 12-month jail sentence. If neither of them confesses, there will be insufficient evidence to convict either of insider trading, but there is enough evidence to convict each of them individually of obstructing justice, which carries a 2-month sentence. If both of them confess, they will both serve a 3-month jail sentence. This situation is:
A) an example of cartel behavior.
B) an application of the prisoner's dilemma.
C) not realistic because those accused of insider trading always keep silent.
D) not realistic because those accused of insider trading are never encouraged to confess.

Question

Quizplus · Accepted Answer

This scenario is a classic example of the prisoner's dilemma, where two individuals acting in their own self-interest do not produce the optimal outcome.

Don and Susanne Have Both Been Accused of Insider Trading