The process of solving multi-stage decision problems by finding the optimal choice in the final stage conditional on earlier choices, and then working back to the beginning taking one stage at a time. Backward induction can be applied to single-agent finite choice problems. It can also be used to solve for the Nash equilibrium in multi-stage games. See also closed-loop equilibrium; open-loop equilibrium.
|Reference: Oxford Press Dictonary of Economics, 5th edt.|