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Behavior in the centipede game: A decision-theoretical perspective

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  • Blavatskyy, Pavlo

Abstract

The centipede game is a two-player finite game of perfect information where a unique subgame perfect Nash equilibrium appears to be intuitively unappealing and descriptively inadequate. This paper analyzes behavior in the centipede game when a traditional game-theoretical assumption that players maximize expected utility is relaxed. We demonstrate the existence of a descriptively adequate subgame perfect equilibrium under two standard decision-theoretical assumptions. First, players choose under uncertainty in a probabilistic manner as captured by embedding a core deterministic decision theory in a model of probabilistic choice. Second, players adopt non-linear decision weights and overweight the likelihood of rare events as captured, for example, by rank-dependent utility or prospect theory.

Suggested Citation

  • Blavatskyy, Pavlo, 2015. "Behavior in the centipede game: A decision-theoretical perspective," Economics Letters, Elsevier, vol. 133(C), pages 117-122.
    • Handle: RePEc:eee:ecolet:v:133:y:2015:i:c:p:117-122
    DOI: 10.1016/j.econlet.2015.05.031
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    More about this item

    Keywords

    Game of perfect information; Subgame perfect Nash equilibrium; Centipede game; Probabilistic choice; Rank-dependent utility;
    All these keywords.

    JEL classification:

    • C72 - Mathematical and Quantitative Methods - - Game Theory and Bargaining Theory - - - Noncooperative Games
    • D81 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Criteria for Decision-Making under Risk and Uncertainty

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