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Belief and Higher-Order Belief in the Centipede Games: Theory and Experiment

This paper experimentally explores people's beliefs behind the failure of backward induction in the centipede games. I elicit players' beliefs about opponents' strategies and 1st-order beliefs. I find that subjects maximize their monetary payoffs according to their stated beliefs less frequently in the Baseline Centipede treatment where an efficient non-equilibrium outcome exists; they do so more frequently in the Constant Sum treatment where the efficiency property is removed. Moreover, subjects believe their opponents' maximizing behavior and expect their opponents to hold the same belief less frequently in the Baseline Centipede treatment and more frequently in the Constant Sum treatment.

JEL-Codes: C72; C92; D83

Keywords: Centipede Game; Rationality; Belief and Higher Order Belief; Laboratory Experiments; Learning

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