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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

    as
    1. AJ A. Bostian & Charles A. Holt & Angela M. Smith, 2008. "Newsvendor "Pull-to-Center" Effect: Adaptive Learning in a Laboratory Experiment," Manufacturing & Service Operations Management, INFORMS, pages 590-608.
    2. Filip Matêjka & Alisdair McKay, 2015. "Rational Inattention to Discrete Choices: A New Foundation for the Multinomial Logit Model," American Economic Review, American Economic Association, pages 272-298.
    3. Etzioni, Amitai, 1986. "Rationality is anti-entropic," Journal of Economic Psychology, Elsevier, vol. 7(1), pages 17-36, March.
    4. Filip Matêjka & Alisdair McKay, 2015. "Rational Inattention to Discrete Choices: A New Foundation for the Multinomial Logit Model," American Economic Review, American Economic Association, pages 272-298.
    5. Colin Camerer & Teck-Hua Ho, 1999. "Experience-weighted Attraction Learning in Normal Form Games," Econometrica, Econometric Society, vol. 67(4), pages 827-874, July.
    6. Gary E. Bolton & Elena Katok, 2008. "Learning by Doing in the Newsvendor Problem: A Laboratory Investigation of the Role of Experience and Feedback," Manufacturing & Service Operations Management, INFORMS, pages 519-538.
    7. Mattsson, Lars-Goran & Weibull, Jorgen W., 2002. "Probabilistic choice and procedurally bounded rationality," Games and Economic Behavior, Elsevier, vol. 41(1), pages 61-78, October.
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    10. Mirko Kremer & Stefan Minner & Luk N. Van Wassenhove, 2010. "Do Random Errors Explain Newsvendor Behavior?," Manufacturing & Service Operations Management, INFORMS, pages 673-681.
    11. Train,Kenneth E., 2009. "Discrete Choice Methods with Simulation," Cambridge Books, Cambridge University Press, number 9780521747387, December.
    12. Maurice E. Schweitzer & Gérard P. Cachon, 2000. "Decision Bias in the Newsvendor Problem with a Known Demand Distribution: Experimental Evidence," Management Science, INFORMS, pages 404-420.
    13. John Conlisk, 1996. "Why Bounded Rationality?," Journal of Economic Literature, American Economic Association, pages 669-700.
    14. Xuanming Su, 2008. "Bounded Rationality in Newsvendor Models," Manufacturing & Service Operations Management, INFORMS, pages 566-589.
    15. Sims, Christopher A., 2003. "Implications of rational inattention," Journal of Monetary Economics, Elsevier, vol. 50(3), pages 665-690, April.
    16. Kurt Jörnsten & Inge Thorsen & Jan Ubøe, 2004. "Replication/prediction problems in the journey to work," Environment and Planning A, Pion Ltd, London, vol. 36(2), pages 347-364, February.
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    More about this item

    Keywords

    Behavioral economics; experimental economics; bounded rationality; probabilistic cost efficiency.;

    JEL classification:

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

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