Impulse balance in the newsvendor game

One striking behavioral phenomenon is the "pull-to-center" bias in the newsvendor game: facing stochastic demand, subjects tend to order quantities between the expected profit maximizing quantity and mean demand. We show that the impulse balance equilibrium, which is based on a simple ex-post rationality principle along with an equilibrium condition, predicts the pull-to-center bias and other, more subtle observations in the laboratory newsvendor game. * Corresponding author: Ockenfels, University of Cologne, Germany, Albertus-Magnus-Platz, D-50923 Cologne, Germany; ockenfels at uni-koeln.de. We thank participants in various seminars in Germany and in the US for helpful comments. We also thank Johannes Fendrich, Lea Pyhel, Andreas Pollak, and Johannes Wahlig for excellent research assistance and help with the collection of data. Ockenfels gratefully acknowledges financial support from the German Science Foundation (DFG) through the Gottfried Wilhelm Leibniz-Program and the Research Unit "Design & Behavior" (FOR 1371).