Equilibrium Play and Adaptive Learning in a Three-Person Centipede Game

Abstract

The two-person centipede game is one of the most celebrated paradoxes of backward induction in complete information extensive form games. An experimental investigation of a three-person centipede game shows that the paradoxical results are strongly affected by the size of the stakes. When the number of players in the game is increased from two to three and the game is played for unusually high stakes with group composition being randomly changed from trial to trial, the paradox is considerably weakened as players approach equilibrium play with multiple iterations of the stage game. When the game is played with low stakes, there is no evidence for equilibrium play or learning across iterations of the stage game. An adaptive learning model that assumes updating of the individual probabilities of choice outperforms alternative static and dynamic models in accounting for the major results observed in the high-stake experiment.

Keywords: Game, Backward induction, experimental study, high vs. low stakes, adaptive learning

JEL Classification: C92, D81