Evolutionary dynamics in finite populations can explain the full range of cooperative behaviors observed in the centipede game

Classical economic models make behavioral predictions based on the assumption that people are fully rational and care only about maximizing their own payoffs. Although this approach successfully explains human behavior in many situations, there is a wealth of experimental evidence demonstrating conditions where people deviate from the predictions of these models. One setting that has received particular attention is fixed length repeated games. Iterating a social dilemma can promote cooperation through direct reciprocity, even if it is common knowledge that all players are rational and self-interested. However, this is not the case if the length of the game is known to the players. In the final round, a rational player will defect, because there is no future to be concerned with. But if you know the other player will defect in the last round, then you should defect in the second to last round, and so on. This logic of backwards induction leads to immediate defection as the only rational (sub-game perfect Nash equilibrium) strategy. When people actually play such games, however, immediate defection is rare. Here we use evolutionary dynamics in finite populations to study the centipede game, which is designed to explore this issue of backwards induction. We make the following observation: since full cooperation can risk-dominate immediate defection in the centipede game, stochastic evolutionary dynamics can favor both delayed defection and even full cooperation. Furthermore, our evolutionary model can quantitatively reproduce human behavior from two experiments by fitting a single free parameter, which is the product of population size and selection intensity. Thus we provide evidence that people's cooperative behavior in fixed length games, which is often called 'irrational', may in fact be the favored outcome of natural selection. (C) 2012 Elsevier Ltd. All rights reserved.