Behavior in the centipede game: A decision-theoretical perspective

Pavlo Blavatskyy

Economics Letters, 2015, vol. 133, issue C, 117-122

Abstract: The centipede game is a two-player finite game of perfect information where a unique subgame perfect Nash equilibrium appears to be intuitively unappealing and descriptively inadequate. This paper analyzes behavior in the centipede game when a traditional game-theoretical assumption that players maximize expected utility is relaxed. We demonstrate the existence of a descriptively adequate subgame perfect equilibrium under two standard decision-theoretical assumptions. First, players choose under uncertainty in a probabilistic manner as captured by embedding a core deterministic decision theory in a model of probabilistic choice. Second, players adopt non-linear decision weights and overweight the likelihood of rare events as captured, for example, by rank-dependent utility or prospect theory.

Keywords: Game of perfect information; Subgame perfect Nash equilibrium; Centipede game; Probabilistic choice; Rank-dependent utility (search for similar items in EconPapers)
JEL-codes: C72 D81 (search for similar items in EconPapers)
Date: 2015
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Persistent link: https://EconPapers.repec.org/RePEc:eee:ecolet:v:133:y:2015:i:c:p:117-122

DOI: 10.1016/j.econlet.2015.05.031

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