The Backward Induction strategy for the Centipede Game leads us to a counterfactual reasoning paradox, The Centipede Game paradox. The counterfactual reasoning proving the backward induction strategy for the game appears to rely on the players in the game not choosing that very same backward induction strategy. The paradox is a general paradox that applies to backward induction reasoning in sequential, perfect information games. Therefore, the paradox is not only problematic for the Centipede Game, but it also affects counterfactual reasoning solutions in games similar to the Centipede Game. The Centipede Game is a prime illustration of this paradox in counterfactual reasoning. As a result, this paper will use a material versus subjunctive/counterfactual conditional analysis to provide a theoretical resolution to the Centipede Game, with the hope that a similar solution can be applied to other areas where this paradox may appear. The solution involves delineating between the epistemic systems of the players and the game theorists.

This thesis consists of four independent chapters, in which well-known economic theories are employed to investigate, and better understand, data and facts from the real world. Although in fairly distant topics, each paper is an example of how economics, and more precisely microeconomics, offers a rigorous and effective framework to reason about what happens around us. In this sense, my dissertation fully represents what I have learnt in these five years. The first paper addresses the experimental behavior of subjects that interact with each other, non-cooperatively, in a laboratory setup. The experimental evidence is found to be at odds with the predictions of classical game-theory, and I explore whether a model of bounded rationality can instead succeed in explaining the data. The second paper looks at another type of data, historical rather than experimental. Together with Björn Wallace, we raise doubts, methodological and interpretational, regarding the validity of a recent finding that documents a sizeable effect of Africa's past slave trades on current economic performance. The last two papers investigate the phenomenon of limited records, understood as the limited availability of past public data regarding a transacting partner. The former is a survey, written jointly with Giancarlo Spagnolo, wherein we discuss the literatures that have independently studied whether limited records may actually prompt beneficial reputation effects. We argue that what is known about this type of informational arrangement is little and scattered, and that this is problematic given the large number of real-life situations featuring limited records. These conclusions prepare the ground for the last paper of this dissertation, which presents a model of limited credit records. The model aims at providing a framework for evaluating the current privacy provisions in the credit market which mandate the removal of information about borrowers' past performance from public registers after a finite number of years. / Diss. Stockholm : Handelshögskolan i Stockholm, 2011

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The general topic of our thesis is forward looking behavior in strategic situations. Mixing theoretical and experimental analysis, we document how strategic thinking is affected by the specific features of a dynamic interaction. The overarching result is that the information regarding decisions that are close to the current one, receive a qualitatively different consideration, with respect to distant ones. That is, the actual decisions are based on reasoning over a limited number of steps, close to actual decison node. We capture this feature of behavior both in a strategic (limited backward induction) and in a non-strategic (limited farsightedness) set up, and we identify relevant consequences on the outcome of the interaction, which powerfullly explain many observed experimental regularities.<p>In the first essay, we present a general out-of-equilibrium framework for strategic thinking in sequential games. It assumes the agents to take decisions on restricted game trees, according to their (limited) foresight level, following backward induction. Therefore we talk of limited backward induction (LBI). We test for LBI using a variant of the race game. Our design allows to identify restricted game trees and backward reasoning, thus properly disentangling LBI behavior. The results provide strong support in favor of LBI. Most players solve intermediate tasks - i.e. restricted games - without reasoning on the terminal histories. Only a small fraction of subjects play close to equilibrium, and (slow) convergence toward it appears, though only in the base game. An intermediate task keeps the subjects off the equilibrium path longer than in the base game. The results cannot be rationalized using the most popular models of strategic reasoning, let alone equilibrium analysis.<p>In the second essay, a subtle implication of the model is investigated: the sensitivity of the players’ foresight to the accessibility and completeness of the information they have, using a Centipede game. By manipulating the way in which information is provided to subjects, we show that reduced availability of information is sufficient to shift the distribution of take-nodes further from the equilibrium prediction. On the other hand, similar results are obtained in a treatment where reduced availability of information is combined with an attempt to elicit preferences for reciprocity, through the presentation of the centipede as a repeated trust game. Our results could be interpreted as cognitive limitations being more effective than preferences in determining (shifts in) behavior in our experimental centipede. Furthermore our results are at odds with the recent ones in Cox [2012], suggesting caution in generalizing their results. Reducing the availability of information may hamper backward induction or induce myopic behavior, depending on the strategic environment.<p>The third essay consists of an experimental investigation of farsighted versus myopic behavior in network formation. Pairwise stability Jackson and Wolinsky [1996] is the standard stability concept in network formation. It assumes myopic behavior of the agents in the sense that they do not forecast how others might react to their actions. Assuming that agents are perfectly farsighted, related stability concepts have been proposed. We design a simple network formation experiment to test these extreme theories, but find evidence against both of them: the subjects are consistent with an intermediate rule of behavior, which we interpret as a form of limited farsightedness. On aggregate, the selection among multiple pairwise stable networks (and the performance of farsighted stability) crucially depends on the level of farsightedness needed to sustain them, and not on efficiency or cooperative considerations. Individual behavior analysis corroborates this interpretation, and suggests, in general, a low level of farsightedness (around two steps) on the part of the agents. / Doctorat en Sciences économiques et de gestion / info:eu-repo/semantics/nonPublished