High-Stakes Failures of Backward Induction

39 Pages Posted: 14 Jun 2022 Last revised: 25 Apr 2023

See all articles by Bouke Klein Teeselink

Bouke Klein Teeselink

King's College London; Yale School of Management

Dennie van Dolder

University of Essex - Department of Economics

Martijn J. van den Assem

Vrije Universiteit Amsterdam

Jason Dana

Yale School of Management

Date Written: April 25, 2023

Abstract

We examine high-stakes strategic choice using more than 40 years of data from the American TV game show The Price Is Right. In every episode, contestants play the Showcase Showdown, a sequential game of perfect information for which the optimal strategy can be found through backward induction. We find that contestants systematically deviate from the subgame perfect Nash equilibrium. These departures from optimality are well explained by a modified agent quantal response model that allows for limited foresight. The results suggest that many contestants simplify the decision problem by adopting a myopic representation and optimize their chances of beating the next contestant only. In line with learning, the quality of contestants' choices improves over the course of our sample period.

Keywords: backward induction, limited foresight, omission bias, quantal response equilibrium, subgame perfect Nash equilibrium

JEL Classification: C73, D01, D91

Suggested Citation

Klein Teeselink, Bouke and van Dolder, Dennie and van den Assem, Martijn J. and Dana, Jason, High-Stakes Failures of Backward Induction (April 25, 2023). Available at SSRN: https://ssrn.com/abstract=4130176 or http://dx.doi.org/10.2139/ssrn.4130176

Bouke Klein Teeselink (Contact Author)

King's College London ( email )

Strand Building
London
United Kingdom

Yale School of Management ( email )

165 Whitney Ave
New Haven, CT 06511

Dennie Van Dolder

University of Essex - Department of Economics ( email )

Wivenhoe Park
Colchester CO4 3SQ
United Kingdom

Martijn J. Van den Assem

Vrije Universiteit Amsterdam ( email )

De Boelelaan 1105
Amsterdam, 1081HV
Netherlands

Jason Dana

Yale School of Management ( email )

135 Prospect Street
P.O. Box 208200
New Haven, CT 06520-8200
United States

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