Detecting Failures of Backward Induction: Monitoring Information Search in Sequential Bargaining
32 Pages Posted: 8 Jan 2009
Date Written: May 2002
We did experiments in a three-round bargaining game where the (perfect) equilibrium offer was $1.25 and an equal split was $2.50. The average offer was $2.11. Patterns of information search (measured with a computerized information display) show limited lookahead rather than backward induction. Equilibrium theories which adjust for social utilities (reflecting inequality-aversion or reciprocity) cannot explain the results because they predict subjects will make equilibrium offers to "robot" players, but offers to robots are only a little lower. When trained subjects (who quickly learned to do backward induction) bargained with untrained subjects, offers ended up halfway between equilibrium and $2.11.
Keywords: bargaining, experimental economics, bounded rationality, behavioral economics, behavioral game theory, fairness, limited cognition
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