Backward Induction or Forward Reasoning? - An Experiment of Stochastic Alternating Offer Bargaining -

Siegfried K. Berninghaus (siegfried.berninghaus@kit.edu), Werner Güth (gueth@coll.mpg.de) and Stephan Schosser (stephan.schosser@ovgu.de)
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Siegfried K. Berninghaus: Karlsruhe Institute of Technology, Institute for Economic Theory and Statistics
Stephan Schosser: University of Magdeburg, Chair of Empirical Economics

No 2012-041, Jena Economics Research Papers from Friedrich-Schiller-University Jena

Abstract: Bounded rationality questions backward induction, which however, does not exclude such reasoning when anticipation is easy. In our stochastic (alternating offer) bargaining experiment, there is a certain first-period pie and a known finite deadline. What is uncertain (except for the final period) is whether there is a further period. Whereas backward induction requires information about all later pie sizes and probabilities, forward reasoning is expected to consider only the immediate prospects. Rather than relying only on decision data, we try to assess the cognitive approach such as forward reasoning of backward induction by control of information retrieval. We find that participants who begin with the shortest games before playing possibly longer games, initially resort to backward induction before switching to forward-looking behavior.

Keywords: backward induction; forward reasoning; bargaining (search for similar items in EconPapers)
JEL-codes: C70 C72 C91 (search for similar items in EconPapers)
Date: 2012-07-12
New Economics Papers: this item is included in nep-cbe, nep-evo, nep-exp and nep-gth
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Working Paper: Backward induction or forward reasoning? An experiment of stochastic alternating offer bargaining (2012)
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