One of the central beliefs in an ideal free market system is that the single-minded pursuit of self-interest will also promote group interest. But in the real market, the costs and benefits of each option depend upon the simultaneous choices of other individuals. Blind pursuit of self-interest may result in sub-optimal individual and group outcome. Behavior to navigate such game-theoretic situations is called strategic.
A well-known game that highlights the conflict between individual and group interest is the prisoner’s dilemma (PD) game. In this game, the dominant strategy for all players is to pursue self-interest. But individually smart choices often lead to collectively dumb solutions.
Even the simple traffic custom of keeping left or keeping right involves a game situation. Indeed, we are playing games more often than we realize.
The prevalence of PD and other binary-choice game situations cries out for extra-market co-ordination and organization. The market may be smart, but is often helpless without government intervention in these tricky game situations. Indeed, the market itself may not have existed without these prior government interventions.
