Backward induction says defect immediately, yet real players cooperate for many rounds, so the logic and the behaviour diverge.
Rosenthal's 1981 game. Rational play says take the money immediately; experimental subjects cooperate for many rounds and do better. It is the standard evidence that backward induction fails as a description of behaviour.
In practice
- Two firms in a renewable annual contract could each squeeze the other at any renewal and neither does, for eleven years.
- A landlord and tenant both know the tenancy will end eventually, and neither behaves as though the last month is the only one that counts.
- Further reading
- Wikipedia
- Subject
- Games & Strategic Interaction
- Essay
- The recurring shapes of conflict and cooperation