Centipede Game

DEFINITION of 'Centipede Game'

An extensive-form game in game theory in which two players alternately get a chance to take the larger share of a slowly increasing money stash. The Centipede Game concludes as soon as a player takes the stash, with that player getting the larger portion and the other player getting the smaller portion. While not as well-known as the famed Prisoner’s Dilemma, the Centipede Game also highlights the conflict between self-interest and mutual benefit with which people have to grapple. It was first introduced by psychologist Robert Rosenthal in 1982. “Centipede Game” is so-called because its original version consisted of a 100-move sequence, and the payoff diagram detailing it looked like a centipede.

BREAKING DOWN 'Centipede Game'

As an example, consider the following version of the Centipede Game involving two players, Jack and Jill, who are playing for a total stash of $100. The game starts with a $2 payoff; Jack goes first, and has to decide if he should "take" the payoff or "pass." If he takes, then he and Jill both get $1 each, but if he passes, the decision to “take or pass” now must be made by Jill. The payoff is now increased by $1 to $3; if Jill takes, she gets the full $3 and Jack gets $0, but if she passes, Jack gets to decide whether to take or pass. If she passes, the payoff is increased by $1 to $4; if Jack takes, the stash is split equally at $2 each. If he passes and Jill takes, the payoff of $5 would be split as follows – Jill $4, Jack $1. The game continues in this vein for a total of 99 rounds. If both players always choose to pass, they each receive a payoff of $50 at the end of the game. Note that the money is contributed by a third party and not by either player.

What does game theory predict? Using backward induction – which is the process of reasoning backward from the end of a problem – game theory predicts that Jack (or the first player) will choose to take on the very first move and both players will receive a $1 payoff.

In experimental studies, however, only a very small percentage of subjects chose to take on the very first move. This discrepancy can be explained by a couple of reasons. One reason is that some people are altruistic, and would prefer to cooperate with the other player by always passing, rather than taking down the pot. Another reason is that people may simply be incapable of making the deductive reasoning necessary to make the rational choice predicted by the Nash equilibrium. The fact that few people take the stash on the very first move is not too surprising, given the small size of the starting payoff when compared with the increasing payoffs as the game progresses.

RELATED TERMS
  1. Backward Induction

    The process of deducing backwards from the end of a problem or ...
  2. Zero-Sum Game

    A situation in which one person’s gain is equivalent to another’s ...
  3. Nash Equilibrium

    A concept of game theory where the optimal outcome of a game ...
  4. Paradox of Rationality

    The irony that rational decision-making in game theory situations ...
  5. Net Payoff

    The profit (or loss) from the sale of an item after the costs ...
  6. Gaming Industry ETF

    A sector exchange-traded fund that invests solely in gaming companies, ...
Related Articles
  1. Economics

    Advanced Game Theory Strategies For Decision-Making

    The importance of game theory to modern analysis and decision-making can be gauged by the fact that since 1970, as many as 12 leading economists and scientists have been awarded the Nobel Prize ...
  2. Fundamental Analysis

    The Basics Of Game Theory

    Break down and examine the potential consequences of economic/financial scenarios.
  3. Options & Futures

    Game Theory: Beyond The Basics

    Take your game theory knowledge to the next level by learning about simultaneous games and the Nash Equilibrium.
  4. Investing

    How To Game The Video Game Industry

    Investopedia explores the business, current developments, future trends of video games industry and how the overall industry makes money.
  5. Investing Basics

    Can Games Make You A Better Investor?

    As investing is a great example of an activity that draws on a wide range of mental and emotional skills, it is worth exploring how to improve this skill set.
  6. Investing

    How The Video Game Industry Is Changing

    Video game creation has become increasingly complex, and the cost of creating a game to run on one of the major consoles has risen with this greater complexity.
  7. Investing

    You Love Video Games, But Do You Know How The Industry Works?

    Traditionally, the video game industry was limited to consoles, such as Microsoft’s (MSFT) Xbox and Sony’s (SNE) PlayStation, but it now includes PC games, mobile games and, in the near future, ...
  8. Fundamental Analysis

    The 6 Most Famous Failed Video Game Makers (KING, ZNGA)

    The video-game industry pulls in $100 billion in revenue annually. Failed companies offer a cautionary tale.
  9. Bonds & Fixed Income

    The Fundamental Mechanics Of Investing

    Here's a story that demonstrates why stocks and bonds were created and how they are valued.
  10. Active Trading

    Get Positive Earnings In The Negative-Sum Market

    Gain an advantage in the markets by understanding how to win in a negative-sum game.
RELATED FAQS
  1. Why is Game Theory useful in business?

    Game theory was once hailed as a revolutionary interdisciplinary phenomenon bringing together psychology, mathematics, philosophy ... Read Answer >>
  2. How is game theory related to the Nash equilibrium?

    Learn how Nash's equilibrium is an important concept in game theory, and understand how it applies to the common prisoner's ... Read Answer >>
  3. What does the Nash equilibrium predict?

    Learn more about the famous Nash equilibrium, which is the revolutionary concept in game theory about the economics of human ... Read Answer >>
  4. What is the difference between a dominant strategy solution and a Nash equilibrium ...

    Dive into game theory and the Nash equilibrium, and learn why the Nash equilibrium assumptions about information are less ... Read Answer >>
  5. How has the popularity of online gaming affected the internet sector?

    Discover how the increasingly popularity of online gaming has directly affected and fundamentally transformed the Internet ... Read Answer >>
  6. What happens when the lender of the borrowed shares in a short sale transaction wants ...

    In a short sale transaction, shares are borrowed from the lender by the short seller and sold in the market. The lender of ... Read Answer >>
Hot Definitions
  1. Cost Of Debt

    The effective rate that a company pays on its current debt. This can be measured in either before- or after-tax returns; ...
  2. Yield Curve

    A line that plots the interest rates, at a set point in time, of bonds having equal credit quality, but differing maturity ...
  3. Stop-Limit Order

    An order placed with a broker that combines the features of stop order with those of a limit order. A stop-limit order will ...
  4. Keynesian Economics

    An economic theory of total spending in the economy and its effects on output and inflation. Keynesian economics was developed ...
  5. Society for Worldwide Interbank Financial Telecommunications ...

    A member-owned cooperative that provides safe and secure financial transactions for its members. Established in 1973, the ...
  6. Generally Accepted Accounting Principles - GAAP

    The common set of accounting principles, standards and procedures that companies use to compile their financial statements. ...
Trading Center