High-Stakes Failures of Backward Induction
39 Pages Posted: 14 Jun 2022 Last revised: 25 Apr 2023
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: Suggested Citation