The Combined Effects of Bounded Rationality and Moral Reasoning on Cooperative and Destructive Equilibria in Finitely Repeated Prisoners' Dilemma Games

Abstract

In the one-shot version of the Prisoners' Dilemma (PD) game, individuals pursue mutually destructive strategies (they both defect). The repeated PD examines whether interactions over time can induce players to adopt cooperative strategies. Cooperation is possible in the infinitely repeated PD. However, in the finitely repeated version, backward induction forces immediate mutual defection. We develop a finitely repeated prisoners' dilemma game that analyses the effects of players' bounded rationality and moral reasoning on cooperative or destructive equilibria. Bounded rationality leads to cooperative behavior in early rounds of the game followed by destructive behavior in later rounds. Increasing moral reasoning results in destructive behavior in early rounds, followed by cooperative behavior in later rounds. Combining these two opposing effects results in possible cyclical behavior, with cooperation in early rounds (due to bounded rationality), defection in the 'middle' rounds (either players are near enough to the end of the game to use backward induction, or the punishment effect is weak), with a return to cooperation near the end of the game, as players begin to act ethically.