Most of the theoretical models in supply chain management adopt a normative approach and assume that decision makers are perfect profit maximizers. However, it has been observed that the decision makers may demonstrate irrational behavior under different operational settings and fail to make optimal decisions. This paper tries to explain the deviations from the optimal decisions using the results from laboratory experiments as well as a descriptive approach. A multinomial logit model is developed to incorporate various behavioral factors such as random error, biases, and learning. Then the model is applied to decisions made in the context of revenue sharing and buyback contracts between a rational supplier and a retailer who, unlike the supplier, is susceptible to decision biases and errors. The results show that the proposed behavioral model can effectively explain the experimental data while it is parametrically parsimonious.

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