Bounded Rationality in Newsvendor Models
Top Cited Papers
- 1 October 2008
- journal article
- Published by Institute for Operations Research and the Management Sciences (INFORMS) in Manufacturing & Service Operations Management
- Vol. 10 (4), 566-589
- https://doi.org/10.1287/msom.1070.0200
Abstract
Many theoretical models adopt a normative approach and assume that decision makers are perfect optimizers. In contrast, this paper takes a descriptive approach and considers bounded rationality, in the sense that decision makers are prone to errors and biases. Our decision model builds on the quantal choice model: While the best decision need not always be made, better decisions are made more often. We apply this framework to the classic newsvendor model and characterize the ordering decisions made by a boundedly rational decision maker. We identify systematic biases and offer insight into when overordering and underordering may occur. We also investigate the impact of these biases on several other inventory settings that have traditionally been studied using the newsvendor model as a building block, such as supply chain contracting, the bullwhip effect, and inventory pooling. We find that incorporating decision noise and optimization error yields results that are consistent with some anomalies highlighted by recent experimental findings.Keywords
This publication has 30 references indexed in Scilit:
- Noisy Directional Learning and the Logit EquilibriumThe Scandinavian Journal of Economics, 2004
- On the Global Convergence of Stochastic Fictitious PlayEconometrica, 2002
- Managing retail channel overstock: markdown money and return policiesJournal of Retailing, 2002
- Muddling Through: Noisy Equilibrium SelectionJournal of Economic Theory, 1997
- Boundedly Rational Nash Equilibrium: A Probabilistic Choice ApproachGames and Economic Behavior, 1997
- Quantal Response Equilibria for Normal Form GamesGames and Economic Behavior, 1995
- The Evolution of ConventionsEconometrica, 1993
- Judgment under Uncertainty: Heuristics and BiasesScience, 1974
- A Behavioral Model of Rational ChoiceThe Quarterly Journal of Economics, 1955
- A law of comparative judgment.Psychological Review, 1927