Strategy Method Effects in Centipede Games: An Optimal Design Approach

Abstract

We explore the twin questions of when and why the strategy method creates behavioral distortions in the elicitation of choices in laboratory studies of sequential games. While such distortions have been widely documented, the theoretical forces driving these distortions remain poorly understood. In this paper, we compare behavior in six optimally designed centipede games, implemented under three different choice elicitation methods: the direct response method, the reduced strategy method and the full strategy method. These methods elicit behavioral strategies, reduced strategies, and complete strategies, respectively. We find significant behavioral differences across these elicitation methods -- differences that cannot be explained by standard game theory, but are consistent with the predictions of the Dynamic Cognitive Hierarchy solution (Lin and Palfrey, 2024), combined with quantal responses.