Scenario: Your car broke down while you were driving to the office one morning. You took it to the nearest service center and were told by the mechanic that you need to pay $500 for the repair. You are uncertain about whether to trust him. If you do not trust him, you have to take it to another service center, which is far away and inconvenient. If you trust him, he can either cooperate or defect (do an honest job or not). If he does an honest job, both of you will gain from the trade. If he does not do an honest job, he will gain $500 while you will lose your money. Clearly, he will gain more by defecting rather than by cooperating with you.
-Refer to the scenario above.You should use ________ to make your decision.

Question

Quizplus · Accepted Answer

Backward induction is the process of thinking about the end result first and then working backward to determine the best course of action. In this scenario, the end result is whether or not the mechanic will do an honest job. By thinking backward, we can determine that if the mechanic defects, we will lose $500, and if the mechanic cooperates, both parties will gain from the trade. Therefore, it is best to trust the mechanic and cooperate with him. However, if the mechanic does defect, we can use this information to make a better decision in the future, such as taking our car to a different service center.

Scenario: Your Car Broke Down While You Were Driving to the Office