Perplexed, have you come across the decision theory posts here yet? You'll find them pretty interesting, I think. LW Wiki for the Prisoner's Dilemma LW Wiki for timeless decision theory (start with the posts- Eliezer's PDF is very long and spends more time justifying than explaining). Essentially, this may be beyond the level of humans to implement, but there are decision theories for an AI which do strictly better than the usual causal decision theory, without being exploitable. Two of these would cooperate with each other on the PD, given a chance to communicate beforehand.

Not necessarily. Various decision theories can come into play here. It depends precisely on what you mean by the prisoner's paradox. If you are playing a true one shot where you have no information about the entity in question then that might be true. But if you are playing a true one shot where you each before making the decision have each player have access to the other player's source code then defecting may not be the best solution. Some of the decision theory posts have discussed this. (Note that knowing each others' source code is not nearly as strong an assumption as it might seem since one common idea in game theory is to look at what game theory occurs when people know when the other players know your strategy. (I'm oversimplifying some technical details here. I don't fully understand all the issues. I'm not a game theorist. Add any other relevant disclaimers.))