Bounded Rationality in Newsvendor Models
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Date: 09-25-2007
Start Time:
1:00pm
End Time: 2:00pm
Speaker: Xuanming Su, University of California, Berkeley
Location: Uris 333
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 upon 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 over-ordering and under-ordering 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.
BIO
Xuanming Su is an Assistant Professor at the Haas School of Business at University of California, Berkeley. He received his Ph.D. from Stanford University in 2004. His research interests include consumer behavior in operations management, behavioral decision-making, and health care.