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Probabilistic cost efficiency and bounded rationality in the newsvendor model

Author

Listed:
  • Ubøe, Jan

    (Dept. of Business and Management Science, Norwegian School of Economics)

  • Andersson, Jonas

    (Dept. of Business and Management Science, Norwegian School of Economics)

  • Jörnsten, Kurt

    (Dept. of Business and Management Science, Norwegian School of Economics)

  • Lillestøl, Jostein

    (Dept. of Business and Management Science, Norwegian School of Economics)

  • Sandal, Leif K.

    (Dept. of Business and Management Science, Norwegian School of Economics)

Abstract

In this paper we establish a link between probabilistic cost efficiency and bounded rationality in the newsvendor model. This establishes a framework where bounded rationality can be examined rigorously by statistical methods. The paper offers a relatively deep theoretical analysis of underorders/overorders in the newsvendor model. The theory is supported by empirical findings from our analysis of empirical data from laboratory experiments. In particular, we observe that underorders are systematically larger than overorders, an issue that our theoretical model explains. From statistical tests we conclude that all variability in our data can be explained by probabilistic cost efficiency and risk aversion.

Suggested Citation

  • Ubøe, Jan & Andersson, Jonas & Jörnsten, Kurt & Lillestøl, Jostein & Sandal, Leif K., 2014. "Probabilistic cost efficiency and bounded rationality in the newsvendor model," Discussion Papers 2014/41, Norwegian School of Economics, Department of Business and Management Science.
    • Handle: RePEc:hhs:nhhfms:2014_041
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    File URL: http://hdl.handle.net/11250/227757
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    References listed on IDEAS

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    More about this item

    Keywords

    Behavioral economics; experimental economics; bounded rationality; probabilistic cost efficiency.;
    All these keywords.

    JEL classification:

    • C00 - Mathematical and Quantitative Methods - - General - - - General
    • C70 - Mathematical and Quantitative Methods - - Game Theory and Bargaining Theory - - - General

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