Backward induction with players who doubt others' faultlessness

We investigate the robustness of the backward-induction outcome, in binaryaction extensive-form games, to the introduction of small mistakes in reasoning. Specifically, when a player contemplates the best action at a future decision node, she assigns some small probability to the event that other players may reach a different conclusion when they carry out the same analysis. We show that, in a long centipede game, the prediction that players do not cooperate fails under this perturbation. Importantly, this result does not depend on forward induction or reputation reasoning. It particular, it applies to finite horizon overlapping generations models with fiat money. J.E.L Classification No. C73, Field: Game Theory ∗We thank the associate editor and two anonymous referees for very helpful comments. We also benefited from discussions with Eddie Dekel, Herakles Polemarchakis, and Asher Wolinsky. †The Economics and Management Department, The Open University of Israel, [email protected] ‡Eitan Berglass School of Economics, Tel Aviv University, [email protected]