Probabilistic Cost Efficiency and Bounded Rationality in the Newsvendor Model

32 Pages Posted: 21 Dec 2014

See all articles by Jan Uboe

Jan Uboe

Norwegian School of Economics (NHH) - Department of Business and Management Science

Jonas Andersson

Norwegian School of Economics (NHH) - Department of Business and Management Science

Kurt Jornsten

Norwegian School of Economics (NHH) - Department of Business and Management Science

Jostein Lillestol

Norwegian School of Economics (NHH) - Department of Business and Management Science

Leif Kristoffer Sandal

Norwegian School of Economics (NHH) - Department of Business and Management Science

Date Written: December 18, 2014

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.

Keywords: Behavioral economics, experimental economics, bounded rationality, probabilistic cost efficiency

JEL Classification: C00, C70

Suggested Citation

Uboe, Jan and Andersson, Jonas and Jornsten, Kurt and Lillestol, Jostein and Sandal, Leif Kristoffer, Probabilistic Cost Efficiency and Bounded Rationality in the Newsvendor Model (December 18, 2014). NHH Dept. of Business and Management Science Discussion Paper No. 2014/41. Available at SSRN: https://ssrn.com/abstract=2540498 or http://dx.doi.org/10.2139/ssrn.2540498

Jan Uboe (Contact Author)

Norwegian School of Economics (NHH) - Department of Business and Management Science ( email )

Helleveien 30
Bergen, NO-5045
Norway

Jonas Andersson

Norwegian School of Economics (NHH) - Department of Business and Management Science ( email )

Helleveien 30
Bergen, NO-5045
Norway

Kurt Jornsten

Norwegian School of Economics (NHH) - Department of Business and Management Science ( email )

Helleveien 30
Bergen, NO-5045
Norway

Jostein Lillestol

Norwegian School of Economics (NHH) - Department of Business and Management Science ( email )

Helleveien 30
Bergen, NO-5045
Norway

Leif Kristoffer Sandal

Norwegian School of Economics (NHH) - Department of Business and Management Science ( email )

Helleveien 30
Bergen, NO-5045
Norway
+47 55 95 93 41 (Phone)

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