The Prisoner’s Dilemma and Credit Card Debt

Being a college senior and economics major, I often see myself wondering why are there so many college students in debt right out of college  (and I don’t mean student loans) with credit card debt.

Therefore, I thought that using the Prisoner’s Dilemma as a sample I could mirror a game in which debt was at stake and the payoff was to pay it off. Could game theory explain why people get in so much debt? Although, that “game theory does not analyze underlined causes or motivations of people’s actions” (Dr. D) I supposed it would be fun to mirror this game using debt instead.

I came across various articles such as The Neuroscience of the Debt Debate, or Why Cooperation Takes a Backseat to Mistrust,  which discusses the brain process that goes on behind using credit cards, getting in debt, and the satisfaction that one feels after paying for them (if any). And then, I found this one U.S. Credit Card Debt Grows, Fewer Americans Make Payments On Time which basically talks about how Americans make use of their credit cards and how they choose to pay for them or not.

After reading both articles it was easier to follow the rationality of the game and follow the same assumptions as the Prisoner’s Dilemma hence:

*Paying off the credit card in full does not have a payoff for society and there is no Pareto Optimality because it will drive down consumer spending and create a recession.

*In addition, paying off one’s debt will not make the other player better off. The only way to maximize one’s utility in the game is if the other player also pays the debt by employing a best response to the other player decision of paying off the debt. Then, if one player pays the debt while the other doesn’t this gets a payoff of (2,0).

*If both decide to pay the debt, they both maximize their utility and get a payoff of (3,3). Yet if none of the players pay the debt they both get payoffs of (0,0).

The drawbacks of this “game” are that it does not offer insights on what really drives consumer spending, what creates debt, and what prevents consumers to pay off their debt. Also, since this game takes after the Prisoner’s Dilemma, each player’s strategies will be best responses to the other player’s dominant or strict strategies, rather than attaining a payoff for oneself as is paying for the debt.

If I were to play this game I would have a dominant strategy of paying the debt instead of the opposite since it will maximize my utility as a self-interest player.

What would your dominant strategy be?

Thoughts?

Until next post.

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1 thought on “The Prisoner’s Dilemma and Credit Card Debt”

  1. Interesting. And I was thinking the same: the game does not offer a perspective on what drives consumer spending, what prevents consumers from paying their debts, etc. These are all viable factors. I would even that another factor that no aggregate game can correctly determine: each person’s individual motivations or notions about their payoffs from paying the credit card debt or choosing not to. For some people, this doesn’t matter — for example, I recently read an article about many people living with mounds of credit card debt that have to using cash for everything, so that they never think about paying it back. For many people, though, I would suspect that the payoff is long term: less debt helps you to establish a good credit history and helps improve your credit score. Still, each individual’s qualitative determination of this benefit varies and that could affect their choice to pay their debt.

    Gavin Grant

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