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Marco Mantovani, ECARES Print
Friday, 22 February 2013, 12:15 - 13:15

Marco Mantovani, ECARES

Limited Backward Induction

Abstract: We present a general out-of-equilibrium framework for strategic thinking in sequential games. It assumes the agents to take decisions on restricted game trees, according to their (limited) foresight type, following backward induction. Therefore we talk of limited backward induction (LBI).  We test for LBI using a variant of the race game. Players sequentially choose an integer within a range; those choices are summed up, until they reach a target number. The player that hits the target wins a prize, the other loses.  We introduce (1) a small prize at an intermediate point, to identify restricted game trees and (2) allow the players to claim victory of the prizes, to extract information about which prize they are targeting. The results provide strong support in favor of LBI. Both actions and claims show that most players solve for the small prize before they do for the final one. Only a small fraction of subjects play close to equilibrium, and (slow) convergence toward it appears only in the base game. Overall the intermediate prize keeps the subjects off the equilibrium path longer than in the base game. The results cannot be explained with other models of strategic reasoning, let alone equilibrium analysis.

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