The dynamic (In) stability of backwards induction

The evolutionary basis for predicting the backwards induction solution in f inite extensive-form games with perfect information is examined. Evolution is modelled using the replicator dynamic in combination with rare perturbat ions that introduce a small change in the proportion of each strategy. The criterion for our judgement is whether this dynamic stabilizes over time at the subgame perfect equilibrium outcome. We find that the backwards induct ion solution is fully justified by this process only in very simple games. Examples of more complex games are given in which this process does not sel ect between the subgame perfect equilibrium outcome and alternative Nash eq uilibrium outcomes. Journal of Economic Literature Classification Numbers: C72, C79. (C) 1998 Academic Press.