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Bounded Rationality in the Centipede Game1

Published online by Cambridge University Press:  03 January 2012

Ashton T. Sperry-Taylor
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Abstract

Normative game theory unsatisfactorily explains rational behavior. Real people do not behave as predicted, and what is prescribed as rational behavior is normally unattainable in real-life. The problem is that current normative analysis does not account for people's cognitive limitations – their bounded rationality. However, this paper develops an account of bounded rationality that explains the rationality of more realistic behavior. I focus on the Centipede Game, in which boundedly rational players explore and test others' immediate behavior, until they can apply limited backward induction. The result is that the game has a solution in the form of a subjective Nash equilibrium, which boundedly rational players can possibly realize.

Type
Research Article
Information
Episteme , Volume 8 , Issue 3 , October 2011 , pp. 262 - 280
Copyright
Copyright © Cambridge University Press 2011

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