The shadow of the past: how experience affects behavior in an iterated prisoner’s dilemma experiment

We study the development of cooperation in a repeated prisoner’s dilemma experiment with teams as players, unknown length and unknown continuation probability as it could happen between traders regularly. To characterize real-world frictions our players are rematched with a new team twice. In such a situation—often found outside the laboratory—agents can get an idea on the likely duration of future interactions by relying on prior experience. Our main finding is that participants apparently transform the infinite-horizon situation into a finite-horizon situation. Not only do we observe decay in cooperation but also unraveling towards the end of a matching. We found a pronounced restart effect of cooperation that induces a steady rise in average cooperation over matchings. Such an effect is not observed after the unexpected continuation of the third match. Stable cooperation paths of considerable length are induced when both players start the matching with joint cooperative moves. We can draw some interesting conclusions from the behavior of the partners for commercial market situations.