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Uncertainty Aversion and Backward Induction

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Author Info
Jorn Rothe (London School of Economics)
Abstract

In the context of the centipede game this paper discusses a solution concept for extensive games that is based on subgame perfection and uncertainty aversion. Players who deviate from the equilibrium path are considered non- rational. Rational players who face non-rational opponents face genuine uncertainty and may have non-additive beliefs about their future play. Rational players are boundedly uncertainty averse and maximise Choquet expected utility. It is shown that if the centipede game is sufficiently long, then the equilibrium strategy is to play `Across' early in the game and to play `Down' late in the game.

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Paper provided by Econometric Society in its series Econometric Society World Congress 2000 Contributed Papers with number 1610.

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Date of creation: 01 Aug 2000
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Handle: RePEc:ecm:wc2000:1610

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  1. Gilboa Itzhak & Schmeidler David, 1993. "Updating Ambiguous Beliefs," Journal of Economic Theory, Elsevier, vol. 59(1), pages 33-49, February. [Downloadable!] (restricted)
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  2. Kreps, David M. & Wilson, Robert, 1982. "Reputation and imperfect information," Journal of Economic Theory, Elsevier, vol. 27(2), pages 253-279, August. [Downloadable!] (restricted)
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  3. Gilboa, Itzhak & Schmeidler, David, 1989. "Maxmin expected utility with non-unique prior," Journal of Mathematical Economics, Elsevier, vol. 18(2), pages 141-153, April. [Downloadable!] (restricted)
  4. McKelvey, Richard D & Palfrey, Thomas R, 1992. "An Experimental Study of the Centipede Game," Econometrica, Econometric Society, vol. 60(4), pages 803-36, July. [Downloadable!] (restricted)
  5. Kreps, David M. & Milgrom, Paul & Roberts, John & Wilson, Robert, 1982. "Rational cooperation in the finitely repeated prisoners' dilemma," Journal of Economic Theory, Elsevier, vol. 27(2), pages 245-252, August. [Downloadable!] (restricted)
  6. Binmore, Ken, 1996. "A Note on Backward Induction," Games and Economic Behavior, Elsevier, vol. 17(1), pages 135-137, November. [Downloadable!] (restricted)
  7. Aumann, Robert J., 1996. "Reply to Binmore," Games and Economic Behavior, Elsevier, vol. 17(1), pages 138-146, November. [Downloadable!] (restricted)
  8. Basu, Kaushik, 1988. "Strategic irrationality in extensive games," Mathematical Social Sciences, Elsevier, vol. 15(3), pages 247-260, June. [Downloadable!] (restricted)
  9. Reny Philip J., 1993. "Common Belief and the Theory of Games with Perfect Information," Journal of Economic Theory, Elsevier, vol. 59(2), pages 257-274, April. [Downloadable!] (restricted)
  10. Milgrom, Paul & Roberts, John, 1982. "Predation, reputation, and entry deterrence," Journal of Economic Theory, Elsevier, vol. 27(2), pages 280-312, August. [Downloadable!] (restricted)
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  11. Rosenthal, Robert W., 1981. "Games of perfect information, predatory pricing and the chain-store paradox," Journal of Economic Theory, Elsevier, vol. 25(1), pages 92-100, August. [Downloadable!] (restricted)
  12. Sarin, Rakesh & Wakker, Peter, 1994. "A General Result for Quantifying Beliefs," Econometrica, Econometric Society, vol. 62(3), pages 683-85, May. [Downloadable!] (restricted)
  13. Kin Chung Lo, 1995. "Extensive Form Games with Uncertainty Averse Players," Working Papers ecpap-95-03, University of Toronto, Department of Economics. [Downloadable!]
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  14. Mukerji, S., 1995. "A Theory of Play for Games in Strategic Form when Rationality is not Common Knowledge," Discussion Paper Series In Economics And Econometrics 9519, Economics Division, School of Social Sciences, University of Southampton.
  15. Dow James & Werlang Sergio Ribeiro Da Costa, 1994. "Nash Equilibrium under Knightian Uncertainty: Breaking Down Backward Induction," Journal of Economic Theory, Elsevier, vol. 64(2), pages 305-324, December. [Downloadable!] (restricted)
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