Quantifying Bounded Rationality: Managerial Behaviour and the Smith Predictor

The concept of bounded rationality in decision making and research on its relegation to aggregate system dynamics is examined. By recasting one such example of a dynamic system, the Beer Game, as a Smith predictor control system is derived. A stability analysis is then employed to support the and qualify the assertion that the level of bounded rationality can adversely affect the aggregate dynamic behaviour of such supply chains. The analytical basis of these calculations enables the qualification of the potential cost improvements resulting from more desirable supply chain dynamics. This approach is designed to inform the strategic investment decision to purchase computational aids in order to overcome the level of bounded rationality in the system.