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.