Scribd
Upload
149 views23 pages

Decision Bias in Newsvendor Problem

This document summarizes research on decision bias in the newsvendor problem. The newsvendor problem involves ordering a quantity of inventory with uncertain demand. Prior research found managers' orders do not maximize expected profits. This study tests whether orders align with descriptive models of decision making like risk aversion, anchoring and adjustment, or preference for minimizing inventory errors. The researchers conducted two experiments with MBA students making inventory decisions under different demand distributions. In Experiment 1 with uniform demand, orders were below the profit-maximizing level, consistent with anchoring on the mean demand and insufficient adjustment. Experiment 2 varied the demand distribution and found orders still diverged from optimal levels, supporting descriptive models of decision biases over pure profit maximization

Uploaded by

Jasmina Tacheva
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
Available Formats
Download as PPTX, PDF, TXT or read online on Scribd
149 views23 pages

Decision Bias in Newsvendor Problem

This document summarizes research on decision bias in the newsvendor problem. The newsvendor problem involves ordering a quantity of inventory with uncertain demand. Prior research found managers' orders do not maximize expected profits. This study tests whether orders align with descriptive models of decision making like risk aversion, anchoring and adjustment, or preference for minimizing inventory errors. The researchers conducted two experiments with MBA students making inventory decisions under different demand distributions. In Experiment 1 with uniform demand, orders were below the profit-maximizing level, consistent with anchoring on the mean demand and insufficient adjustment. Experiment 2 varied the demand distribution and found orders still diverged from optimal levels, supporting descriptive models of decision biases over pure profit maximization

Uploaded by

Jasmina Tacheva
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
Available Formats
Download as PPTX, PDF, TXT or read online on Scribd
You are on page 1/ 23

Decision Bias in the

Newsvendor Problem
with a Known Demand
Distribution:
Experimental Evidence
Schweitzer and Cachon, 2000

Introduction
Newsvendor problem: short selling
season with stochastic demand,
one order opportunity, balance
between underage & overage
costs.
Problem is well-known, but there is
little engagement with how
managers make decisions.
Order Q ex-ante is rarely the best

Introduction
Managers decisions dont
correspond to expected profitmaximizing order Q (Fisher and
Raman 1996), but no explanation
provided.
Anchoring and insufficient
adjustment bias (Sterman 1989).
Influence of Supply chain design
(Croson and Donohue 1998).

Introduction
Preferences other than profit
maximization risk-averse
behavior (Eechhouldt et al. 1995).
Inventory level heuristic.
Biased forecast done away with
in this paper.

Descriptive Models

Inefficient order Q not consistent with:


Risk aversion
Risk-seeking preferences
Prospect theory preferences
Loss aversion
Stockout aversion.
Undervaluing opportunity costs
Consistent with:
Preference to reduce ex-post inventory error
Anchoring and insufficient adjustment.

The Newsvendor Problem


q, D, , F, f, c, p, s.

High- and low-profit products:

Utility Maximizing Orders

Risk Neutral Preferences


un(w) = w -> max un(w) = max
E[(q,D)]
qn is the optimal risk-neutral order Q

Risk-averse and Riskseeking Preferences

Prospect Theory
Preferences
Risk-averse over domain of gains
and risk-seeking over domain of
losses (Kahneman and Tversky
1979);
reference point = current wealth.
with all gains = less than qn.
with all losses = more than qn.
with both = depends.

Loss-averse Preferences

q1<qn

q1/<0

Waste-Averse Preferences

qt<qn

Stockout-Averse
Preferences

qm>qn

Underestimating
Opportunity Costs

qo<qn

Preference for Minimizing


Ex-Post Inventory Level

Anchoring and Insufficient


Adjustment
mean anchor heuristic on mean
demand, adjusting towards qn.
chasing demand on prior order Q,
adjusting towards prior D.

Experiment 1: Uniform
Demand
34 MBA students
selling wodgets
not informed about total # of
rounds, or future price and cost.
30 inventory decisions
critical fractiles: 25 and 75%-> 75
and 225 qn.

Experiment 1

Experiment 1

Experiment 1: Procedure
Initial inventory decisions
unconfounded
Average high-profit order Q =
176.68<225;
Average low-profit order Q =
134.06>75.
Double repeated measures
generalized linear model.
Mean and chasing demand

Adjustment Scores
mean anchor heuristic:

chasing demand heuristic:

Experiment 2: High
Demand Distribution
44 2nd year MBA students
losses are not possible <increased D range: low [1,300] and
high [901,1200]
qn low: 225 or 75
qn high: 1125 or 975

Results
High-D: 186.88 or 1092.55
Low-D: 142.17 or 1021.81

You might also like