Two prisoners are offered the same deal – if one of them testifies and the other doesn’t talk, the talker will go free and the holdout will go to jail for 10 years. If both refuse to talk, the prosecutor will only be able to put them in jail for six months. If each prisoner rats out the other, they will both get five-year sentences. Not knowing what the other prisoner will do, how should each one act?

This is the classic prisoners dilemma, which provides an important lesson for many budding young economists everywhere. If you (assuming you are the prisoner) talk, you either end up going free or getting a five year sentence. If you don’t talk, you either go to jail for six months or ten years.

From an individual standpoint, this makes it very tempting to talk, even though the best thing for the prisoners is if both keep their mouths shut – hence the dilemma, as the the optimal individual decisions do not lead to the optimal group outcome. To get to the optimal group decision, the prisoners must work together – which in this case means having a strong, established trust.

Which takes us to cooperation, and in a roundabout way to Dr. Nowak. As covered in this NY Times article (free registration required), Dr. Nowak has been using the principles of the prisoner’s dilemma to study cooperation, which he argues is one of the three basic principles of evolution (the others being mutation and selection).

It appears to be a fascinating bit of research he is doing, and the implications of it are great – while enabling and benefiting from cooperation is a key element of wikinomics, Nowak is also using the same principles to do things like seek out a cure for cancer, and wade knee deep into the study of evolution and altruistic behavior.

According to Dr. Nowak, the conditions in which cooperation can arise can be shown in a simple equation: B/C>K. That is, cooperation will emerge if the benefit-to-cost (B/C) ratio of cooperation is greater than the average number of neighbors (K).

Not surprisingly, the real juice for cooperation comes when reputations come into play. By pioneering a version of PD in which players acquire reputations, They found that if reputations spread quickly enough, they could increase the chances of cooperation taking hold. Players were less likely to be fooled by defectors and more likely to benefit from cooperation.

Further… Reputation has a powerful effect on how people play games. People who gain a reputation for not cooperating tend to be shunned or punished by other players. Cooperative players get rewarded.

Do you think there might be some implications from this relevent to the role of reputation profiles in sites like Facebook, Digg, YouTube, etc… and could this type of research help formalize/ structure and analysis for optimizing relationships within an ever evolving peer production community?