Uncertainty Aversion and Backward Induction

Jorn Rothe
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Jorn Rothe: London School of Economics

No 1610, Econometric Society World Congress 2000 Contributed Papers from Econometric Society

Abstract: In the context of the centipede game this paper discusses a solution concept for extensive games that is based on subgame perfection and uncertainty aversion. Players who deviate from the equilibrium path are considered non- rational. Rational players who face non-rational opponents face genuine uncertainty and may have non-additive beliefs about their future play. Rational players are boundedly uncertainty averse and maximise Choquet expected utility. It is shown that if the centipede game is sufficiently long, then the equilibrium strategy is to play `Across' early in the game and to play `Down' late in the game.

Date: 2000-08-01
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