TITLE:
Rationalizing Irrational Beliefs
AUTHORS:
Geoffrey Dunbar, Ruqu Wang, Xiaoting Wang
KEYWORDS:
Centipede Game, Game Theory, Experimental Economics, Behavioral Economics
JOURNAL NAME:
Theoretical Economics Letters,
Vol.6 No.6,
November
21,
2016
ABSTRACT: In this paper we propose a “behavioral equilibrium” definition for a class of dynamic
games of perfect information. We document various experimental studies of the
Centipede Game in the literature that demonstrate that players rarely follow the
subgame perfect equilibrium strategies. Although some theoretical modifications
have been proposed to explain the outcomes of the experiments, we offer another:
players can choose whether or not to believe that their opponents use subgame perfect
equilibrium strategies. We define a “behavioral equilibrium” for this game; using
this equilibrium concept, we can reproduce the outcomes of those experiments.