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Limited backward induction: foresight and behavior in sequential games

Listed author(s):
  • Marco Mantovani

The paper tests experimentally for limited foresight in sequential games. We develop a general out-of-equilibrium framework of strategic thinking based on limited foresight. It assumes the players take decisions focusing on close-by nodes, following backward induction – what we call limited backward induction (LBI). The main prediction of the model is tested in the context of a modified Game of 21. In line with the theoretical hypotheses, our results show most players think strategically only on close-by nodes without reasoning backwards from the end of the game. A small fraction of subjects play close to equilibrium, while few others try to exploit the limited foresight of their opponent. The results provide strong support for LBI, and cannot be accounted for using the most popular models of strategic thinking, let alone equilibrium analysis.

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File URL: http://dems.unimib.it/repec/pdf/mibwpaper289.pdf
File Function: First version, 2015
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Paper provided by University of Milano-Bicocca, Department of Economics in its series Working Papers with number 289.

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Length: 39
Date of creation: Jan 2015
Date of revision: Jan 2015
Handle: RePEc:mib:wpaper:289
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  7. Marcus Dittrich & Kristina Leipold, 2014. "Gender Differences in Strategic Reasoning," CESifo Working Paper Series 4763, CESifo Group Munich.
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  9. Dufwenberg, Martin & Sundaram, Ramya & Butler, David J., 2010. "Epiphany in the Game of 21," Journal of Economic Behavior & Organization, Elsevier, vol. 75(2), pages 132-143, August.
  10. Binmore, Ken, 1996. "A Note on Backward Induction," Games and Economic Behavior, Elsevier, vol. 17(1), pages 135-137, November.
  11. Mengel, Friederike, 2014. "Learning by (limited) forward looking players," Journal of Economic Behavior & Organization, Elsevier, vol. 108(C), pages 59-77.
  12. Shaun Hargreaves Heap & David Rojo Arjona & Robert Sugden, 2014. "How Portable Is Level‐0 Behavior? A Test of Level‐k Theory in Games With Non‐Neutral Frames," Econometrica, Econometric Society, vol. 82(3), pages 1133-1151, 05.
  13. Johnson, Eric J. & Camerer, Colin & Sen, Sankar & Rymon, Talia, 2002. "Detecting Failures of Backward Induction: Monitoring Information Search in Sequential Bargaining," Journal of Economic Theory, Elsevier, vol. 104(1), pages 16-47, May.
  14. Teck-Hua Ho & Xuanming Su, 2013. "A Dynamic Level-k Model in Sequential Games," Management Science, INFORMS, vol. 59(2), pages 452-469, March.
  15. Theodoros M. Diasakos, 2008. "Complexity and Bounded Rationality in Individual Decision Problems," Carlo Alberto Notebooks 90, Collegio Carlo Alberto.
  16. Rapoport, Amnon & Stein, William E. & Parco, James E. & Nicholas, Thomas E., 2003. "Equilibrium play and adaptive learning in a three-person centipede game," Games and Economic Behavior, Elsevier, vol. 43(2), pages 239-265, May.
  17. Paolo Crosetto & Marco Mantovani, 2012. "Availability of Information and Representation Effects in the Centipede Game," Jena Economic Research Papers 2012-051, Friedrich-Schiller-University Jena.
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