BACKWARD INDUCTION OR FORWARD REASONING? – AN EXPERIMENT OF STOCHASTIC ALTERNATING OFFER BARGAINING

Siegfried K. Berninghaus (), Werner Güth () and Stephan Schosser ()
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Siegfried K. Berninghaus: Institute for Economic Theory and Statistics, Karlsruhe Institute of Technology, 76049 Karlsruhe, Germany
Werner Güth: Strategic Interaction Group, Max Planck Institute of Economics, 07745 Jena, Germany
Stephan Schosser: Chair of Empirical Economics, University of Magdeburg, 39106 Magdeburg, Germany

International Game Theory Review (IGTR), 2014, vol. 16, issue 01, 1-30

Abstract: Bounded rationality questions backward induction without necessarily excluding 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 rely on reasoning for which only the immediate prospects may be relevant. Rather than relying only on decision data, we assess forward reasoning by control of information retrieval before the first move. Participants begin with the shortest games before playing possibly longer games. Surprisingly they rely on forward reasoning already for the shortest game as revealed by their information retrieval and choice data.

Keywords: Backward induction; forward reasoning; bargaining; experimental analysis; D03; D50; D82 (search for similar items in EconPapers)
JEL-codes: B4 C0 C6 C7 D5 D7 M2 (search for similar items in EconPapers)
Date: 2014
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DOI: 10.1142/S0219198914400052

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