Advertisement

Explanatory power of behavioral models in the newsvendor problem: a simulation study

  • Christian KösterEmail author
  • Heike Schenk-Mathes
  • Christopher Specht
Original Paper
  • 62 Downloads

Abstract

Experience weighted attraction (EWA) combines reinforcement learning with fictious play models and has proven to perform well as an explanatory model in economic experiments on individual decision making. Yet, EWA is a relatively complex model with a rather large number of free parameters and includes characteristics of simpler decision models, which might explain its good performance on laboratory data in the past. We present a simulation study which uses different models (including EWA) to generate order decisions in a newsvendor setting. Next, maximum likelihood estimations of these models are executed on the generated data and the fit of the models is evaluated using information criteria. Attention is focused on the performance of EWA. Furthermore, we present analyses on the parameter mix of EWA if more parsimonious models or a mix of these simpler models are used. Our results indicate that decision makers in newsvendor problems do not follow unique and simple decision rules. The results indicate that (1) the maximum likelihood procedure combined with the use of information criteria generally is suited to identify the true model; (2) EWA does not perform well when static models are given; yet, (3) in a mix of static and dynamic models EWA once again performs best. Given the past success of EWA on experimental data on both aggregate and individual level, these results may indicate that decision makers in newsvendor problems do not follow unique and simple decision rules.

Keywords

Adaptive learning Simulation Individual decision making Behavioral operations management Newsvendor problem 

JEL Classification

C91 M11 M21 

References

  1. Akaike H (1973) Information theory and an extension of the maximum likelihood principle. In: Petrov BN, Caski F (eds) Proceedings of the second international symposium on information theory. Budapest, pp 267–281Google Scholar
  2. Benzion U, Cohen Y, Peled R, Shavit P (2008) Decision-making and the newsvendor problem—an experimental study. J Oper Res Soc 59:1281–1287.  https://doi.org/10.1057/palgrave.jors.2602470 CrossRefGoogle Scholar
  3. Bolton GE, Ockenfels A, Thonemann U (2012) Managers and students as newsvendors. Manag Sci 58:2225–2233.  https://doi.org/10.1287/mnsc.1120.1550 CrossRefGoogle Scholar
  4. Bostian AA, Holt CA, Smith AM (2008) Newsvendor “Pull-to-Center” effect: adaptive learning in a laboratory experiment. Manuf Serv Oper Manag 10:590–608.  https://doi.org/10.1287/msom.1080.0228 CrossRefGoogle Scholar
  5. Camerer CF, Ho TH (1998) Experience-weighted attraction learning in coordination games: probability rules, heterogeneity, and time-variation. J Math Psychol 42:305–326.  https://doi.org/10.1006/jmps.1998.1217 CrossRefGoogle Scholar
  6. Croson D, Croson R, Ren Y (2008) How to manage an overconfident newsvendor. Working Paper, Southern Methodist UniversityGoogle Scholar
  7. Cui Y, Chen LG, Chen J, Gavirneni S, Wang Q (2013) Chinese perspective on newsvendor bias: an exploratory note. J Oper Manag 31:93–97.  https://doi.org/10.1016/j.jom.2012.10.001 CrossRefGoogle Scholar
  8. de Véricourt F, Jain K, Bearden JN, Filipowicz A (2013) Sex, risk and the newsvendor. J Oper Manag 31:86–92.  https://doi.org/10.1016/j.jom.2012.11.001 CrossRefGoogle Scholar
  9. Dertwinkel-Kalt M, Köster M (2017) Salient compromises in the newsvendor game. J Econ Behav Organ 141:301–315.  https://doi.org/10.1016/j.jebo.2017.07.008 CrossRefGoogle Scholar
  10. Feng T, Keller LR, Zheng X (2011) Decision making in the newsvendor problem: a cross-national laboratory study. Omega 39:41–50.  https://doi.org/10.1016/j.omega.2010.02.003 CrossRefGoogle Scholar
  11. Ho T-H, Camerer CF, Chong J-K (2007) Self-tuning experience weighted attraction learning in games. J Econ Theory 133:177–198.  https://doi.org/10.1016/j.jet.2005.12.008 CrossRefGoogle Scholar
  12. Ho T-H, Lim N, Cui TH (2010) Reference dependence in multilocation newsvendor models. A structural analysis. Manag Sci 56:1891–1910.  https://doi.org/10.1287/mnsc.1100.1225 CrossRefGoogle Scholar
  13. Köster C (2015) Bestellmengenentscheidungen bei asymmetrisch verteilter Nachfrage. Springer, WiesbadenCrossRefGoogle Scholar
  14. Köster C, Schenk-Mathes HY (2016) Explanatory and predictive power of the adaptive learning model. Average and heterogeneous behavior in a newsvendor context. J Bus Econ 86:361–387.  https://doi.org/10.1007/s11573-016-0814-8 CrossRefGoogle Scholar
  15. Kuha J (2004) AIC and BIC: comparison of assumptions and performance. Sociol Methods Res 33:188–229.  https://doi.org/10.1177/0049124103262065 CrossRefGoogle Scholar
  16. Long X, Nasiry J (2014) Prospect theory explains newsvendor behavior. the role of reference points. Manag Sci 61:3009–3012.  https://doi.org/10.1287/mnsc.2014.2050 CrossRefGoogle Scholar
  17. Luce RD (1959) Individual choice behavior: a theoretical analysis. Wiley, New YorkGoogle Scholar
  18. McFadden DL (1976) Quantal choice analaysis: a survey. Ann Econ Soc Meas 5:363–390Google Scholar
  19. Nagarajan M, Shechter S (2014) Prospect theory and the newsvendor problem. Manag Sci 60:1057–1062.  https://doi.org/10.1287/mnsc.2013.1804 CrossRefGoogle Scholar
  20. Ockenfels A, Selten R (2014) Impulse balance in the newsvendor game. Games Econ Behav 86:237–247.  https://doi.org/10.1016/j.geb.2014.03.012 CrossRefGoogle Scholar
  21. Ren Y, Croson R (2013) Overconfidence in newsvendors orders: an experimental study. Manag Sci 59:2502–2517.  https://doi.org/10.1287/mnsc.2013.1715 CrossRefGoogle Scholar
  22. Schwarz G (1978) Estimating the dimension of a model. Ann Stat 6:461–464CrossRefGoogle Scholar
  23. Schweitzer ME, Cachon GP (2000) Decision bias in the newsvendor problem with a known demand distribution: experimental evidence. Manag Sci 46:404–420.  https://doi.org/10.1287/mnsc.46.3.404.12070 CrossRefGoogle Scholar
  24. Su X (2008) Bounded rationality in newsvendor models. Manuf Serv Oper Manag 10:566–589.  https://doi.org/10.1287/msom.1070.0200 CrossRefGoogle Scholar

Copyright information

© Springer-Verlag GmbH Germany, part of Springer Nature 2018

Authors and Affiliations

  1. 1.Clausthal University of TechnologyClausthal-ZellerfeldGermany

Personalised recommendations