Belief and higher‐order belief in the centipede games: An experimental investigation

Abstract

AbstractThis paper experimentally explores the epistemic conditions behind people's non‐equilibrium behaviour in the centipede games. We propose a novel design of laboratory experiment to elicit people's first‐ and second‐order beliefs regarding their opponents' choices and beliefs. The measured beliefs, together with the choice data, help us to estimate people's level of rationality, belief of rationality and second‐order belief of rationality. To examine how these epistemic variables are affected by the social‐efficiency property of the classic increasing‐sum centipede game, we revisit the constant‐sum centipede and compare the measured epistemic conditions from the constant‐sum with those from the classic centipede. We find that people's non‐backward induction behaviour may be attributed to the diffusion of beliefs and higher‐order beliefs in the increasing‐sum centipede. We consider a behavioural model in which people's preferences for social efficiency are incorporated into the extended utility maximization problem. Our analytical and estimation results indicate that the presence of efficiency‐oriented players and people's belief towards the uncertain portion of such type of players may play a part in the non‐backward‐induction outcomes in experimental centipede games.