Abstract

We present experimental results on the role of beliefs in the cognitive ability of others in a problem involving backward induction. Using a modified version of the so-called race game, our design allows the effects of a player’s own inability to perform backward induction to be separated from the effects of her disbelief in the ability of others to do so. We find that behavior is responsive to the dependence on others who might fail in backward induction as well as information regarding their backward induction skills.

Highlights

  • Extensive experimental research has driven home the point that the behavior of inexperienced players in novel strategic situations is in stark contrast to game-theoretical predictions [1,2,3,4,5,6,7,8,9,10,11]

  • The number of games won in the first series is on average 2.43, backing the finding that applying backward induction is troublesome in initial response [20]

  • To answer the question of whether disbelief in others affects decisions in backward induction problems, we look at treatment effects regarding the choice of payoff options in the second series

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Summary

Introduction

Extensive experimental research has driven home the point that the behavior of inexperienced players in novel strategic situations is in stark contrast to game-theoretical predictions [1,2,3,4,5,6,7,8,9,10,11]. Several factors can be identified as potential causes for out-of-equilibrium behavior in “initial responses” [12]. These include unobservable other-regarding preferences as well as a general inability to understand the rules of the game [13,14]. Special attention has been directed at studying two factors of out-of-equilibrium behavior; i.e., bounded rationality and disbelief in the cognitive abilities of co-players. Amount of irrationality and a relaxation of common knowledge of rationality [15,16]. The underlying intuition is clear: Playing according to equilibrium predictions might be unwise when paired with irrational players or players who believe in the irrationality of their co-players, or mutual knowledge of rationality of higher order is violated

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