Detecting Failures of Backward Induction: Monitoring Information Search in Sequential Bargaining

Creators: Johnson, Eric J.; Camerer, Colin; Sen, Sankar; Rymon, Talia

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Abstract

We did experiments in a three-round bargaining game where the (perfect) equilibrium offer was $1.25 and an equal split was $2.50. The average offer was $2.11. Patterns of information search (measured with a computerized information display) show limited lookahead rather than backward induction. Equilibrium theories which adjust for social utilities (reflecting inequality-aversion or reciprocity) cannot explain the results because they predict subjects will make equilibrium offers to "robot" players, but offers to robots are only a little lower. When trained subjects (who quickly learned to do backward induction) bargained with untrained subjects, offers ended up halfway between equilibrium and $2.11.

Additional Information

© 2002 Elsevier Science. Received 30 January 2001; accepted 30 April 2001; available online 22 May 2002. The financial support of NSF 88-09299 and NSF 90-23531 to the first two authors is gratefully acknowledged. We also thank Rachel Croson, Brian Becker, Barry Blecherman, Gerard Cachon, David Goldstein, Teck-Hua Ho, Keith Weigelt, Ben Wilner, and many colleagues at Penn for their work and ideas. We also have received helpful comments from several referees and seminar participants at many universities including Harvard, Cornell, New York University, Penn State, Rochester, Toronto, Minnesota, MIT, and the International Conference on Game Theory (Florence) and BoWo IV (Bonn).

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