Behavior in the Centipede Game: A Decision-Theoretical Perspective
14 Pages Posted: 9 Sep 2014
Date Written: September 8, 2014
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.
Keywords: Game of perfect information, Subgame perfect Nash equilibrium, Centipede game, Probabilistic choice, Rank-dependent utility
JEL Classification: C72, D81
Suggested Citation: Suggested Citation