High-Stakes Failures of Backward Induction: Evidence from “The Price Is Right”

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Abstract

We examine high-stakes strategic choice using more than 40 years of data from the American TV game show The Price Is Right. In every episode, contestants play a simple sequential game of perfect information for which the optimal strategy can be found through backward induction. We find that contestants systematically deviate from the unique subgame perfect Nash equilibrium and from the equilibrium of an agent quantal response model. Omission bias cannot explain the deviations from optimality. Instead, the observed behaviour is well captured by a model of limited foresight, where a sizable fraction of the contestants myopically considers the next stage of the game only. In line with learning, the quality of contestants’ choices improves over the course of our sample period.

The Speaker

Dr Dennie van Dolder is a Senior Lecturer in Economics at the University of Essex (UK). He is also the director of ESSEXLab, the state-of-the-art behavioural laboratory at the Faculty of Social Sciences at Essex.  In his research,  he  uses a broad  portfolio  of research methods–including experiments and advanced microeconometric  techniques–to  further  our  understanding  of  human  judgment  and  decision  making. Before moving to Essex, Dennie was an Assistant Professor at the Vrije Universiteit (VU)  Amsterdam  and a Research Fellow  at  the  University of  Nottingham  (UK).  He serves as an Associate Editor for the Journal of Economic Behavior & Organization. Personal website: www.dennievandolder.com.