Unpredictable stock prices and how our irrationality makes us prisoners of trade

A woman monitors trade at the Nairobi Securities Exchange. Lack of rational thinking makes prediction of a stock market almost impossible. FILE 

By MARVIN SISSEY

In Summary

• In seeking to betray each other, commerce has a way of making sure we pay high cost and lose out.

Tanui and Juma have been arrested for robbing a bank and are held in separate isolation cells with no means of speaking to or exchanging messages with each other.

Tanui and Juma are good friends but they also have young families which they strongly care for and would give anything to go back to.

A clever prosecutor makes the following offer to each of them: “You have two options. You may confess or remain silent. If you confess and your accomplice remains silent I will drop all charges against you but will use your testimony to make sure that your accomplice gets three years imprisonment.

‘‘Likewise, if you choose to remain silent and your accomplice confesses then he will go Scot-free while you serve three years. If both of you confess you will get two years apiece behind bars. Meanwhile, if both of you remain silent you get only one year apiece. If you wish to confess, you must leave a note with the jailer before my return tomorrow morning.”

And therein lies the dilemma. First, this ‘‘confession’’ is basically a cleverly disguised betrayal of each other.

Desirable betrayal

However, it sounds like a desirable betrayal because whatever action the other party takes will result in a lesser sentence (two years if both confess and Scot free if one doesn’t.)

However, there seems to be an even bigger reward if both decide to remain loyal to each other and keep silent for they will only get one year’s sentence.

But by remaining silent each risks being betrayed by the other party, who may confess, and find themselves serving three years.

If they really care for each other, it makes sense that they think about their well-being as well as the well-being of their accomplice and keep silent.

However, if they don’t trust each other they would feel safer confessing to risk two years rather than the whole three years.

This problem, christened ‘‘The prisoner’s dilemma’’ by Albert Tucker, is an example of how two individuals may not cooperate even where it is in their best interest to do so. When this experiment was conducted, an overwhelming number of people chose to confess. It felt like the logical choice.

But, while not only displaying the selfish beings that we can be as humans, in pure economic terms it does not portray the best possible outcome that the two individuals could get when they chose to confess.

Let me share another hypothetical game with you. Suppose someone gave me Sh1,000 and three options.

I can share some, all or none of the money with you the reader. But here is the trick. If you accept my offer then we will each keep the money as per my proposal.