Game Theory

The most maddening outcome in strategic decision-making is when every player makes the rational choice and everyone ends up worse off.

That's the Prisoner's Dilemma in one sentence. Two players each face a choice: cooperate for a good collective outcome, or defect for a slightly better individual outcome. The catch: if both players reason this way, both defect — and both end up worse off than if they had cooperated. What makes it a genuine dilemma (and not just a failure of coordination) is that defecting is the dominant strategy: it's better for you regardless of what the other player does. If they cooperate, you do better by defecting. If they defect, you still do better by defecting. The logic is airtight. And it leads both players to a collectively terrible outcome.

John Nash formalized this in what we now call a Nash Equilibrium: a state where no player can improve their outcome by changing their strategy unilaterally, even if the outcome is bad for everyone involved. The equilibrium is stable — not because it is good, but because no single player can escape it unilaterally.

A price war between two airlines is a clean example. Both would earn more by keeping prices high. But each one has a rational incentive to undercut the other. So they both cut. So they both earn less.