Decision-making and the newsvendor problem: an experimental study

Abstract

This paper investigates repetitive purchase decisions of perishable items in the face of uncertain demand (the newsvendor problem). The experimental design includes: high, or low profit levels; and uniform, or normal demand distributions. The results show that in all cases both learning and convergence occur and are effected by: (1) the mean demand; (2) the order-size of the maximal expected profit; and (3) the demand level of the immediately preceding round. In all cases of the experimental design, the purchase order converges to a value between the mean demand and the quantity for maximizing the expected profit.

The Impact of a Target on Newsvendor Decisions

“…While these results are obtained based on continuously distributed demand, they can be easily extended to the non-continuous case by redefining the inverse function of the demand probability distribution. Our results are consistent with the behavioral observation made by multiple studies (Schweitzer and Cachon 2000, Benzion et al 2008, Bolton and Katok 2008, and Bostian et al 2008). Schweitzer and Cachon (2000) argue that "new techniques may be required to correctly optimize these systems".…”

A Review of Behavioral Decision Making in the Newsvendor Problem

“…This phenomenon is called "pull-to-center" (PTC hereafter) effect. Later on, several other studies also confirmed the similar too low/too high pattern (else, underordering and over-ordering) of choices in newsvendor experiment (Benzion et al 2008, Bolton and Katok 2008, Bostian et al 2008, Lurie and Swaminathan 2009, Kremer et al 2010, Moritz et al 2013. These studies provide insights into identifying biases and decision heuristics of individual decision making in newsvendor setting.…”

“…For the symmetric cumulative demand function about mean, a newsvendor will exhibit "pull to center" effect Schweitzer and Cachon (2000), Bostian et al (2008), Kremer et al (2010Kremer et al ( , 2014, Bell (1982Bell ( , 1985, Sugden (1982,1987) anchoring and insufficient adjustment bias tendency of decision maker to use a reference point, or 'anchor' and then insufficiently adjusting away from this anchor two alternative anchors:  mean anchor heuristic, and,  previous demand chasing heuristic Schweitzer and Cachon (2000), Benzion et al (2008), Bolton and Katok (2008) limited rationality of decision makers due to their cognitive limitations, insufficient information, time and cost constraints a boundedly rational newsvendor chooses an order quantity which is more satisficing rather than optimal, i.e. he chooses high yielding order quantities with larger probability Simon (1955), Su (2008), Kremer et al (2010), Katok (2011), (Ovchinnikov et al 2015) overconfidenc e bias (or, overprecision) tendency of decision maker to overestimate their own opinions due to precise information that they believe they have An overconfident newsvendor will underestimate the variance of demand and make suboptimal ordering decisions.…”

“…Gavirneni and Xia (2009) found that decision maker would anchor close to the optimal solution when he has multiple pieces of information available. Benzion et al (2008) investigated the impact of demand information on order choices. They conducted an experiment where participants were provided with the knowledge of demand parameters and found that demand information is not a significant factor in decision making.…”

Coordinating Contracts in SCM: A Review of Methods and Literature

“…On the other hand, the small number of empirical research papers in this area is almost unanimously indicating that the actual decision making process in supply chains are hugely influenced by bounded rationality, anchoring, experience, and insufficiently adjusted heuristics (e.g. Schweitzer and Cachon (2000), Bolton and Katok (2008), and Benzion et al (2008)). Additionally, the empirical studies of supply chain contracts do not reach beyond the laboratory tests-perhaps due to the sensitivity of necessary information.…”