Blog 07/20 – Michael Bursik

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About our Blog 2020

After receiving very positive feedback on our blog contributions in the last years, we would like to continue this still young tradition of the Liechtenstein Academy Blog also this year.

Also in 2020, it is important for us to consider very different perspectives in order to offer you the most stimulating possible offer. This year, we have been able to attract six well-known guest authors, who, with no editorial filters, write about their personal thoughts. Look forward to new and surprising insights from Michael Bursik, complex issues, simply explained by Ulrich Schnabel, philosophical insights from Dr. Ina Schmidt, astute thoughts by our language and legal expert Carlos A. Gebauer, exciting topics around the many topics of working in the digital era by Sibylle Mäder as well as constructive considerations of our health expert Christoph von Oldershausen.

We wish you a stimulating read.

Your Liechtenstein Academy team

The mathematics of trust

Corona – how quickly the meaning of a word can change. Until the beginning of 2020 it was associated with an exotic Mexican beer, today the name stands for a worldwide pandemic. With Covid-19 a virus entered the world stage that turned our social life upside down and whose economic impact cannot yet be fully assessed. But although future developments are uncertain, it is a good time to take a look at the past months and draw the right conclusions. This is the only way to ensure that the future will be a better place than the present.

To comment on an unimportant event in German, it is common to hear the proverb: «In China a sack of rice fell over». The origin of this expression is unclear, but the future of the saying can be glimpsed in light of developments in recent weeks and months: It will probably disappear from our vocabulary.

Never before has it been so obvious how interconnected and interdependent our world has become. Within a very short time, a limited local event developed into a worldwide pandemic. Economy and society would have been better prepared if it had been a computer virus. But to deal with this biological threat, we need a human virtue, the cost of which is generally estimated to be greater than the benefit: trust.

Common sense is the best weapon against the virus... I think we are all doomed!

In my home region, the virus only came to the fore when it became clear that popular winter resorts were affected. It was unclear how dangerous the situation would become – and so the official measures to contain the spread were somewhat lax. Returnees from affected regions were advised to voluntarily go into quarantine. Hardly anyone followed this recommendation. Why should they self-punish if they had nothing worse to fear themselves except the virus?

It was only when the virus was spreading in northern Italy and frightening images of overcrowded hospitals came to us that the authorities decided to take more stringent measures. But why did it need official instructions at all? Why could we not rely on common sense and voluntary self-restraint? It brings to mind a thought experiment known in game theory as the Prisoner's Dilemma.

The Prisoner's Dilemma as a thought experiment

Imagine that you and a good friend are suspected of having committed a crime. At the police station the following picture is presented to you: If you both confess to the crime, you can both expect four years in prison. If you both remain silent about the facts of the case, you will be sentenced to two years' imprisonment for the mere suspicion.

Now the situation becomes interesting, because you both get a joker: Denounce your accomplice with a confession and you have the chance to get out of this with only one year in prison. But only if they don't rat you out. Otherwise, four years in prison. However, if you remain silent but are betrayed, you will receive a six-year prison sentence. You don't have the chance to talk to your friend. What would you choose? Most likely, your decision depends on the trust you have in your friend.

Individually, confession is the best strategy in this situation. The risk is reduced to a maximum of four years’ imprisonment and includes the chance of being prosecuted with only one year. Silence is the risky option, because although the prospect of two years’ imprisonment versus four years seems attractive, this option involves the risk of being charged with six years’ imprisonment. And you gamble away the chance to get away with just one year.

Trust is the lubricant of cooperation

Thanks to the mathematician John Nash, whose life was portrayed in the film «A Beautiful Mind», which is well worth seeing, we have a solution concept that became known as Nash equilibrium. It can also be applied to the Prisoner's Dilemma. I would like to spare you the mathematics, because the solution already reveals itself when you repeat the game in your mind. Imagine that the prison sentence is not calculated after a single round, but from the average value of several rounds. Would this perspective have an influence on your decision in the first round?

Let's play it through: Betray your accomplice in the first round to reduce their sentence, then send a message. The following rounds will probably be less cooperative. Silence in the first round, and you run the risk of getting six years in prison. Played over several rounds, it is obvious in the game that the two-year prison sentence is an attractive but dangerous option. The risk can only be resolved through trust. If a person breaks the trust, mutual sanctions will be imposed.

It becomes exciting when one looks at the overall result rather than the individual result. If both players cooperate over ten rounds, a total of 40 years’ imprisonment will result. If they consistently betray each other, we will end up with 80 years in prison. And if they accuse each other, we get a total of 66 years in prison. So if you want to achieve an overall optimum in the long term, you need trust and the courage to cooperate.

Trust is not a one-way street

So when we define a «new normal» according to Corona, be it on a social level or in business enterprises, we should make trust a virtue. Short-term returns can rarely be achieved with it, because these are usually at the expense of other system participants, but in return we get sustainability. However, trust does not have to be blind, but should rather be applied as a deliberately chosen strategy.

In game theory, the most promising strategy in the Prisoner's Dilemma is the so-called «tit-for-tat»: one cooperates until the opponent deviates, only then one focuses on the individual advantage. If we can integrate this principle into our «common sense», then we will be prepared for any further crisis.

Written by: Michael Bursik