How Does Overconfidence Affect Decision Making of the Green Product Manufacturer?

Abstract

Overconfidence is a universal and prevalent cognitive bias affecting decision making in operation management. In this paper, overconfidence is defined as a cognitive bias in which decision makers overestimate the accuracy of demand forecasting or (and) the demand itself. We call these two behaviors overprecision and overestimation, respectively. In order to explore how overconfidence affects decision making of the green product manufacturer, we build the demand function based on the manufacturer’s overconfidence and establish a newsboy-based model. Then the influence of overconfidence on product greenness, output, and profit is mainly discussed. We have several new sights as follows. First, overconfidence makes the manufacturer produce greener products than the rational manufacturer, and overestimation results in a higher greenness deviation than overprecision. Second, the influence of overconfidence on the output of green products is quite different from that of nongreen products. Specifically speaking, overestimation makes the manufacturer produce more products than the rational manufacturer, so do the overprecision manufacturer and the dual-overconfident manufacturer under the low-profit condition. But in high-profit condition, when greening investment factor is low and (or) consumers are sensitive enough to greenness, the overprecision manufacturer produces more than the rational manufacturer; when the level of overestimation exceeds a threshold, output of the dual-overconfident is greater than that of the rational manufacturer. Third, overconfidence makes the real profit of the manufacturer less than optimal profit of the rational manufacturer. There is a positive cross-effect of overprecision and overestimation in real profit of the dual-overconfident manufacturer. That is, to some extent, one kind of overconfidence can offset the decline in profit caused by the other kind of overconfidence.

Supply Chain Emission Reduction Decisions, Considering Overconfidence under Conditions of Carbon Trading Price Volatility

“…However, in low-carbon supply chains, overconfidence can also affect the amount of money firms invest in R&D for emission reduction. Studies by Liu [47] and From Figures 4 and 5, one can see that, in all three scenarios, the product emission reduction rate, market demand and supply chain members' profits are inversely proportional to the manufacturer's emission reduction costs coefficient. In addition, the impact of manufacturers' overconfidence on supply chain members will gradually decrease as the emission reduction costs increase.…”

“…However, in low-carbon supply chains, overconfidence can also affect the amount of money firms invest in R&D for emission reduction. Studies by Liu [47] and Lu [48] et al concluded that overconfidence can lead to greener, low-carbon products, but at the same time can lead to higher costs and less profitability for firms [42]. This paper constructs a supply chain system with one retailer and one manufacturer and introduces the behavioral characteristics of manufacturer overconfidence.…”

“…In addition, some other scholars have analyzed the impact of overconfidence on supply chain reduction decisions in the background of a low-carbon economy. Liu et al [47] stated that overconfidence makes manufacturers increase the greenness of their products, compared to rational manufacturers. This will increase the profits of retailers and the whole supply chain [48] but hurts the manufacturer's own profits [49].…”

Effect of fairness and overconfidence on pricing strategy of substitute bundles in a two-echelon supply chain

“…Hence, the manufacturer sometimes exhibits overconfidence behaviour, i.e., the manufacturer anticipates more market demand than actual. For instance, the world's largest manufacturer of polysilicon wafers, Jiang Xi Saiwei LDK Solar Energy High Tech Co LTD., producing photovoltaic products, was bankrupted with loans of 20 billion RMB from 14 banks due to excessive stocking (over-estimation of demand) [26]. Zhou et al [51] defined manufacturers' overconfidence as a belief bias that they overestimate the impact of product greenness on demand and the accuracy of demand uncertainty.…”

Differential game model and coordination model for green supply chain based on green technology research and development

“…Many countries and regions have successively issued relevant energy-saving and environmental protection laws and regulations, prompting enterprises to attach importance to green production ( Hamedirostami et al, 2021 ; Do et al, 2020 ). For example, in 2006, the European Union began to implement the “Directive on the Restriction of the Use of Certain Hazardous Substances in Electrical and Electronic Equipment” ( Jiang et al, 2019 ; So and Xu, 2016 ; Liu et al, 2019 ). In 2013, China issued the “Interpretation of the Supreme People's Court and the Supreme People's Procuratorate on Several Issues Concerning the Application of Law in the Handling of Environmental Pollution Criminal Cases” ( van Rooij, 2010 ).…”