Cognitive Hierarchies and the Centipede Game

SSE/EFI Working Paper No. 723

33 Pages Posted: 9 Feb 2010

Date Written: January 19, 2010

Abstract

In this work, I extend the normal form cognitive hierarchy model (Camerer et al. (2004)) to a class of finite two-person extensive form games. I study two versions of such a model: the first is as faithful as possible to the normal form assumptions, while the second modifies them slightly. In both cases I consider the possibility of Bayesian updating. I apply the two versions to the centipede game, testing empirically the relevant predictions. The results show that the cognitive hierarchy model outperforms backward induction in predicting experimental behavior. Moreover, modifying the original assumptions improves our understanding of the data.

Keywords: centipede game, cognitive hierarchy, paradox backward induction

JEL Classification: C72, C92, D03, D81

Suggested Citation

Bottero, Margherita, Cognitive Hierarchies and the Centipede Game (January 19, 2010). SSE/EFI Working Paper No. 723. Available at SSRN: https://ssrn.com/abstract=1549508 or http://dx.doi.org/10.2139/ssrn.1549508

Margherita Bottero (Contact Author)

Bank of Italy ( email )

Via Nazionale 91
Rome, 00184
Italy

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