Risk Tolerance and the Prisoner\'s

Risk Tolerance and the Prisoner's Dilemma

High Tolerance and Low Tolerance Risk-Taking Profile and Cooperator/Defector Prediction in the Prisoner's Dilemma

Theoretical Section

Data/Information from Previous research

Annexes - Storyboard

Risk tolerance refers to the amount of risk one feels comfortable with in their business transactions. Everyone has a different risk tolerance profile. Some feel comfortable throwing caution to the wind and are not afraid of the consequences as long as there is great potential for gain. Others are not willing to take even a small risk, preferring stability even if it means little gain. A certain amount of entrepreneurial risk is necessary when entering into a new market. Risk assessment tests are available to assess the level of risk with which one feels comfortable.

The prisoner's dilemma is a fundamental problem in game theory. The prisoner's dilemma is a part of game theory that explores the willingness of prisoner's who have been separated to cooperate with authorities and tell on their accomplice, thus gaining themselves freedom and condemning their partner. However, if both parties refuse to cooperate, they will both receive a shortened sentence. The essence of the game depends on the selfishness of the prisoners and whether they want the entire prize for themselves, at a considerable risk, or whether they will the safe route for a mutual, but smaller gain.

The prisoner's dilemma is the basis for a game that simulates the scenario of the prisoner's dilemma is that basis for several nonzero sum online simulators. That pair players and track whether they collude or cheat. In repetitions of the game, the propensity to cooperate or implicate the other changes as one reacts to the patterns and reactions of the others. This research contends that the amount of risk tolerance of two players will determine the likelihood that they will take the cooperative (safe) route, or whether they will play the selfish risk taker and implicate the other a majority of the time.

This research will use 25 paired subjects. They will first be given an assessment scale to determine their risk tolerance. They will then play a simulation using the prisoner's dilemma. It is expected that those with a high risk tolerance will be more likely to take the selfish "winner take all" choice and that those with low risk tolerance will be likely to take the safer, lower reward route. This research will examine the impact of a psychological trait (risk tolerance) and its impact on economic strategy.

This research will demonstrate how the areas of psychology and economics are intimately tied. This is a relatively new concept for academic study. People and their decisions are more than algorithms and equations. This research will explore how risk tolerance affects the motivation to take an economic action. The prisoner's dilemma has been a part of game theory for many years. Much of the literature that explores the prisoner's dilemma is centered on the development of mathematical algorithms as a means to predict player outcomes. However, this research takes a different approach and attempts to predict economic outcomes based on the psychological traits of the players.

This research has implications for the business world, as it examines the likelihood that one will take actions that are selfishly motivated, or whether they would take cooperative actions. It is applicable to many competitive environments, such as oligopolies, monopolies, and other market structures. Often economists forget that psychological traits are intimately linked to business decisions. This research will bridge the studies of psychology and economics in an attempt to develop better predictive models in the future.

High Tolerance and Low Tolerance Risk-Taking Profile and Cooperator/Defector Prediction in the Prisoner's Dilemma

I. Introduction

A. Primary Research Question: "Does risk tolerance predict selfish behavior or cooperative behavior in the Prisoner's Dilemma Game?"

1. Information needed for support: This research will require information from two different branches of academic study. It will explore academic journals related to risk tolerance and that which is related to the Prisoner's Dilemma in game theory. It will also need to explore how these factors affect various business decisions regarding cooperation between firms and the affect of prisoner's dilemma on business strategy in different market settings.

2. Sub-Question 1: "Does a high/risk tolerance make a player more likely to take the selfish route and defect in the Prisoner's Dilemma Game?"

a. The information needed for this section of the study will stem from academic studies concerning high-risk tolerance and defector likelihood in the Prisoner's Dilemma Game.

3. Sub-Question 2: "Does a low/risk tolerance make a player more likely to cooperate in the Prisoner's Dilemma Game?"

a. The information needed for this section of the study will stem from academic studies concerning low-risk tolerance and cooperator likelihood in the Prisoner's Dilemma Game.

4. Sub-Question 3: "Is the predictive nature of high or low risk takers more likely to be predictive of actions in the Prisoner's Dilemma game?"

b. This question will address the predictive nature of high and low risk takers. It may be that one group is more likely than the other to act in a predictable manner. This question will also address the external validity issues of the study, as it examines whether the predictive values for high or low risk takers are skewed towards one risk tolerance profile or another.

B. Chapter 2. Literature Review

This section will review relevant literature in academic journal in areas related to the subject area. The literature review will have to examine all areas that are relevant to the topic area. It is not expected that many studies will be able to be located that directly address the topic at hand, as this is an area that is yet to be addressed by the academic community. The literature review will included an examination of literature related to risk tolerance, risk tolerance and motivation, the prisoner's dilemma, the prisoner's dilemma and game theory, and any other topic that is related to these areas.

C. Chapter 3: Methodology

The methodology to be used in this study will combine methods from two disciplines. It will use a psychological scale that measures risk tolerance with the Prisoner's Dilemma Game used in economic studies. Scores on the risk tolerance scale will be matched with scores on the Prisoner's Dilemma Game to determine if risk tolerance scores will prove predictive of the decisions made in the Prisoner's Dilemma Game. This section of the study will examine the test procedures, sample population, and study instruments that will be used in the conduct of this study; it will justify the reasoning for the selection of the research methods.

D. Chapter 4: Results

This chapter of the study will present the research findings in a format that is easy to understand and interpret. It will use tables and graphs to present the results of the study. It will also present any analytical methods that are used in the study.

E., Chapter 5: Discussion and Conclusions

The results of the study are discussed in relation to the hypotheses and research questions. The conclusions and implications of the research are presented in this section. It will also examine the future direction of research in this area.

Theoretical Section

A. Purpose Statement

The purpose of this study is to examine how psychological factors contribute to decisions that affect the economic landscape and the amount of cooperation that can be expected, according to the risk profile of those involved.

1. Claims: The researcher is claiming that a relationship exists between risk tolerance and the actions taken during the Prisoner's Dilemma Game.

2. Reasons: The claims of the researcher are based on previous studies surrounding the Prisoner's Dilemma and the affect of risk tolerance on behavior.

3. Evidence: Academic studies from related areas will be used to support the basic premise of the study. However, it is expected that the number of studies that support the premise of the study will be low, as this is an areas that has not yet received considerable attention. Therefore, research will have to be drawn from related areas of research from the two areas that are being merged.

4. Other Points-of-View: Only two articles could be found that mentioned the idea of risk and its association with the Prisoner's Dilemma. However, no academic articles could be found. Therefore, no opposing points-of-view on the topic could be found. It represents a new area of research on game theory.

5. Logical link between my evidence and my message: Although, this research merges ideas from two seemingly different areas of study, when one examines the topics it becomes apparent that a certain amount of risk is involved in the Prisoner's Dilemma. The risk lies in cooperation, because if the other person does not cooperate as well, then the player would theoretically get a 10-year prison sentence. There are risks and rewards in either choice in the Prisoner's Dilemma. However, the stakes are higher for the choice of cooperation than for defection. Therefore, it is reasonable that a person's risk tolerance level would have an affect on the choice that they make.

B. Research Design Rationale

1. Question format: In order to allow the research study to become embedded in the field of economics, the research question will use an applied question format. The purpose of the study is to develop a predictive method regarding player choices in the Prisoner's dilemma. It will explore the association of risk and cooperation or defection in the Prisoner's

Dilemma.

2. Research design: The research will use a deductive approach where the theory will be presented and tested through the methodology. The research will use quantitative research methods, which are suited for research where the information can be reduced to a numerical format. This is the case in the proposed study as both risk tolerance and the decisions made in the Prisoner's Dilemma can be reduced to numerical data and standard statistical methods applied.

III. Data/Information from Previous research

A. Literature Review

The literature review for the study will be divided into several sub-headings, as several different areas of study must be addressed. This is original research and it is expected that very little research will exist on the exact topic to be studied. The following sections and sub-sections will be explored in order to gain a thorough understanding of the research problem.

1. Risk Tolerance and Behavior: This section of the Literature review will explore research on the connection between risk tolerance or risk aversion and behavior. This area has received considerable academic attention in recent years.

2. Risk Tolerance and Motivation towards Selfish or Cooperative Action: This section of the research is expected to yield a lower number of actual studies, but is it is targeted more specifically to the problem that is being researched. This will be essential research in understanding the predictive merit of risk tolerance in the Prisoner's Dilemma.

3. The Prisoner's Dilemma: The Prisoner's Dilemma in relation to Game Theory has been studied many times. This section will explore the various studies that have been conducted on the Prisoner's Dilemma. It will only address those that address topic in economics, as this concept has been expanded to included many other areas of study that are not related to economics or the question to be addressed.

4. Game Theory and Competitor Actions in Various Markets: This section of the literature review will e essential in the ability to apply the research to economics and to practical problems that exist in the world today. As the global economy becomes more integrated and companies are faced with different decision than they were in the past, they must often make decisions regarding whether to form alliances with former partners, or whether to defect and protect their own market share. This section of the literature review will examine risk and game theory relate to these decisions. It is expected that a wide body of research will be found on this topic area.

IV. Data Analysis

A. Statistical Analysis

1. Risk Tolerance Data: Risk Tolerance data will be separate from Prisoner's Dilemma data collected from the game. Risk Tolerance surveys will be given, producing a number along a scale that ranges from high risk tolerance to low risk tolerance. This number will follow the subject throughout the study and will be directly tied to a specific study participant.

2. Prisoner's Dilemma Data: Each subject will be paired with another person and they will play 25 rounds of the Prisoner's Dilemma. The reason for multiple rounds is that eventually, each player gets to know the other player and will make decisions based on what they think the other will do.

This is the point of the game. Their scores will follow them, as with the risk tolerance score. No effort will be made to pair high risk takers with low risk takers, or any other combination. This data will result a group of scores for each player for each of the 25 rounds. The data will be analyzed as to whether the player was a cooperator or a defector a majority of the times.

3. Correlation: Game player pairs will be divided into several categories according to their risk tolerance scale results. The direction of the pairing will be insignificant the categories of player pairs will be as follows.

a. high tolerance to high tolerance

b. high tolerance to low tolerance

c. low tolerance to low tolerance

4. Prediction: The hypothesis of the study will state that risk tolerance scores will be predictive or actions in the Prisoner's Dilemma Game. Prisoner's Dilemma data will result in the players being further categorized as cooperators or defectors. Combining these categories with risk tolerance data will result in the following subject categories: high tolerance/cooperator, high tolerance/defector, low tolerance/cooperator, and low tolerance/defector. If the hypothesis holds true a person who is high tolerance be more likely to be a cooperator and low risk tolerance persons would be more likely to be a cooperator. The percentage or subjects in each category will be compared to demonstrate whether the hypothesis holds true or not.

V / Discussion/Conclusion

A. Discussion

The implications of the study results will be discussed. This section will discuss how the results of the study can be applied to real-world situations and the changing competitive landscape of the global economy. It will discuss future research that needs to be addressed in this area. It will tie the results of the study together in a way that reflects a contribution to the study of economics.

B. Conclusion

This final section of the study will summarize the research and present the final conclusions that can be drawn regarding the hypotheses and research questions.