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Backward Induction or Forward Reasoning? - An Experiment of Stochastic Alternating Offer Bargaining -

Author

Listed:
  • Siegfried K. Berninghaus

    (Karlsruhe Institute of Technology, Institute for Economic Theory and Statistics)

  • Werner Güth

    (Max Planck Institute of Economics, Strategic Interaction Group)

  • Stephan Schosser

    (University of Magdeburg, Chair of Empirical Economics)

Abstract

Bounded rationality questions backward induction, which however, does not exclude such reasoning when anticipation is easy. In our stochastic (alternating offer) bargaining experiment, there is a certain first-period pie and a known finite deadline. What is uncertain (except for the final period) is whether there is a further period. Whereas backward induction requires information about all later pie sizes and probabilities, forward reasoning is expected to consider only the immediate prospects. Rather than relying only on decision data, we try to assess the cognitive approach such as forward reasoning of backward induction by control of information retrieval. We find that participants who begin with the shortest games before playing possibly longer games, initially resort to backward induction before switching to forward-looking behavior.

Suggested Citation

  • Siegfried K. Berninghaus & Werner Güth & Stephan Schosser, 2012. "Backward Induction or Forward Reasoning? - An Experiment of Stochastic Alternating Offer Bargaining -," Jena Economics Research Papers 2012-041, Friedrich-Schiller-University Jena.
    • Handle: RePEc:jrp:jrpwrp:2012-041
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    References listed on IDEAS

    as
    1. Rubinstein, Ariel, 1982. "Perfect Equilibrium in a Bargaining Model," Econometrica, Econometric Society, vol. 50(1), pages 97-109, January.
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    More about this item

    Keywords

    backward induction; forward reasoning; bargaining;
    All these keywords.

    JEL classification:

    • C70 - Mathematical and Quantitative Methods - - Game Theory and Bargaining Theory - - - General
    • C72 - Mathematical and Quantitative Methods - - Game Theory and Bargaining Theory - - - Noncooperative Games
    • C91 - Mathematical and Quantitative Methods - - Design of Experiments - - - Laboratory, Individual Behavior

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