Cognitive Hierarchies and the Centipede Game
SSE/EFI Working Paper No. 723
33 Pages Posted: 9 Feb 2010
Date Written: January 19, 2010
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: Suggested Citation