MSOM(2008)Bounded Rationality in Newsvendor Models——by Xuanming Su
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 on 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 overordering and underordering 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.
MS(2008) Social Preferences and Supply Chain Performance:An Experimental Study——by Christoph H. Loch
Supply chain contracting literature has traditionally focused on aligning incentives for economically rational
players. Recent work has hypothesized that social preferences, as distinct from economic incentives, may
influence behavior in supply chain transactions. Social preferences refer to intrinsic concerns for the other
party’s welfare, reciprocating a history of a positive relationship, and intrinsic desires for a higher relative payoff
compared with the other party’s when status is salient. This article provides experimental evidence that social
preferences systematically affect economic decision making in supply chain transactions. Specifically, supply
chain parties deviate from the predictions provided by self-interested profit-maximization models, such that
relationship preference promotes cooperation, individual performance, and high system efficiency, sustainable
over time; whereas status preference induces tough actions and reduces both system efficiency and individual
performance.
MSOM(2010) Do Random Errors Explain Newsvendor Behavior?——by Mirko Kremer
Previous experimental work showed that newsvendors tend to order closer to mean demand than prescribed
by the normative critical fractile solution. A recently proposed explanation for this mean ordering behavior
assumes that the decision maker commits random choice errors, and predicts the mean ordering pattern because
there is more room to err toward mean demand than away from it. Do newsvendors exhibit mean ordering
simply because they make random errors? We subject this hypothesis to anempirical test that rests onthe fact
that the random error explanation is insensitive to context. Our results strongly support the existence of contextsensitive decision strategies that rely directly on (biased) order-to-demand mappings, such as mean demand
anchoring, demand chasing, and inventory error minimization
MS(2013)Prospect Theory and the Newsvendor Problem——by Mahesh Nagarajan, Steven Shechter
The newsvendor problem is a fundamental decision problem in operations management. Various independent
experimental studies in laboratory settings have shown similar deviations from the theoretical optimal order
quantity. We clarify that Prospect Theory, a prevalent framework for decision making under uncertainty, cannot
explain the consistent empirical findings