Published online by Cambridge University Press: 03 January 2012
Normative game theory unsatisfactorily explains rational behavior. Real people do not behave as predicted, and what is prescribed as rational behavior is normally unattainable in real-life. The problem is that current normative analysis does not account for people's cognitive limitations – their bounded rationality. However, this paper develops an account of bounded rationality that explains the rationality of more realistic behavior. I focus on the Centipede Game, in which boundedly rational players explore and test others' immediate behavior, until they can apply limited backward induction. The result is that the game has a solution in the form of a subjective Nash equilibrium, which boundedly rational players can possibly realize.