Question

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:

Answer 1

Answer:

The situation described in the question is referred to as the Prisoner's Dilemma.      

   

Explanation:

The prisoner's dilemma is an example of a situation in Game Theory.

Game Theory is a subject which can be found under behavioural economics with strong roots in psychology. It is related to the science of decision making in by people and how those decisions affect others. In the simplest of cases, just as is given in the question, the dynamics is between two individuals.

According to the theory, sometimes an equilibrium is reached. This point refers to point in a game or a scenario where the decision by the two individuals is firmed up and as a result, the consequences of such determined.

If the decision by each player is such that it can no longer be changed by any of the players in order to improve their benefits accruable, such decisions are referred to as the Nash Equilibrium.

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