Impulse Balance and Multiple-Period Feedback in the Newsvendor Game

Human subjects in the newsvendor game place suboptimal orders: orders are typically between the expected profit‐maximizing quantity and mean demand (“pull‐to‐center bias”). In previous work, we have shown that impulse balance equilibrium (IBE), which is based on a simple ex post rationality principl...

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Bibliographic Details
Published in:	Production and operations management 2015-12, Vol.24 (12), p.1901-1906
Main Authors:	Ockenfels, Axel, Selten, Reinhard
Format:	Article
Language:	eng
Subjects:	bounded rationality debiasing behavior Decision analysis Feedback Game theory impulse balance newsvendor game Predictions Studies
Online Access:	Get full text
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Summary:	Human subjects in the newsvendor game place suboptimal orders: orders are typically between the expected profit‐maximizing quantity and mean demand (“pull‐to‐center bias”). In previous work, we have shown that impulse balance equilibrium (IBE), which is based on a simple ex post rationality principle along with an equilibrium condition, can predict ordering decisions in the laboratory. In this study, we extend IBE to standing orders and multiple‐period feedback and show that it predicts—in line with previous findings—that constraining newsvendors to make a standing order for a sequence of periods moves the average of submitted orders toward the optimum.
ISSN:	1059-1478 1937-5956