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Behavior in the centipede game: A decision-theoretical perspective

Blavatskyy, P. (2015) Behavior in the centipede game: A decision-theoretical perspective. Economics Letters, 133 (August). pp. 117-122.

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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.

Item Type: Journal Article
Murdoch Affiliation(s): School of Management and Governance
Publisher: Elsevier
Copyright: Elsevier
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