Strategic Implications of Confirmation Bias‐Inducing Advertising

Bagchi, Rajesh; Ham, Sung H.; He, Chuan

doi:10.1111/poms.13176

Cited by 6 publications

(3 citation statements)

References 61 publications

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“…Du et al (2019) consider that entrants are biased in estimating the incumbent's repositioning ability and study how the decision bias influences the equilibrium outcomes. From a consumer perspective, Bagchi et al (2020) study the effects of consumers' confirmation bias on firms' advertising and pricing strategies and the associated profits. While decision biases often mean deviations from the rational behaviors for firms, the studies above show that in complex settings they do not necessarily lead to a worse performance, and can be beneficial in some cases.…”

Section: Decision Biasesmentioning

confidence: 99%

Impacts of barter exchange and decision biases in a two‐level supply chain under pull contract

Zhang

Chen

Lin

2021

Int Trans Operational Res

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Barter exchange has been growingly popular in business for its advantage to liquidate excessive inventory. While barter exchange is relevant to supply chain management, little is known about its impacts on the supply chain contracting and efficiency. This study explores these issues in a two-level supply chain under a wholesale-price pull contract, where the manufacturer undertakes the inventory risk. Stackelberg equilibriums are derived when the two supply chain agents are rational and biased, respectively. We show that barter exchange encourages the retailer to provide a lower wholesale price to the manufacturer and induces the manufacturer to produce more. Barter exchange benefits the retailer and the supply chain system, thereby improving the supply chain efficiency, but may harm the manufacturer. We further examine the impacts of the supply chain agents' decision biases in barter exchange, where the retailer and the manufacturer may overestimate or underestimate the supply rate of what the retailer needs. When the retailer believes the manufacturer holds the same level of bias, the retailer's overestimation renders it to offer a lower wholesale price, thereby leading the manufacturer to produce less. This finding implies that the retailer's overestimation enhances double marginalization and reduces the supply chain efficiency. The manufacturer's overestimation leads it to produce more. However, when the biased retailer learns the manufacturer's decision bias accurately, the retailer's overestimation brings a higher wholesale price, thereby inducing a higher manufacturer's production quantity and a higher supply chain efficiency. The manufacturer's overestimation induces a lower wholesale price and a higher production quantity.

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Section: Decision Biasesmentioning

confidence: 99%

Impacts of barter exchange and decision biases in a two‐level supply chain under pull contract

Zhang

Chen

Lin

2021

Int Trans Operational Res

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“…In addition, results revealed that the abnormal negotiation volume and the standard deviation of abnormal trading volume are significantly higher for new authorities with better readability, which suggest that investors respond to the news more readable to the authorities with more trading behavior. Bagchi et al (2020) investigated the impact of consumers' confirmation bias on firms' advertising and pricing strategies and its implications for firms' profits. Findings revealed that confirmation bias improve firms' profits in the longer time horizon.…”

Section: Literature Reviewmentioning

confidence: 99%

Impact of the confirmation bias on returns, expectations and hedging of optimistic and pessimistic traders before and during COVID-19 pandemic

Trichilli

Gaadane

Abbes

et al. 2022

EMJB

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PurposeIn this paper, the authors investigate the impact of the confirmation bias on returns, expectations and hedging of optimistic and pessimistic traders in the cryptocurrencies, commodities and stock markets before and during COVID-19 periods.Design/methodology/approachThe authors investigate the impact of the confirmation bias on the estimated returns and the expectations of optimistic and pessimistic traders by employing the financial stochastic model with confirmation bias. Indeed, the authors compute the optimal portfolio weights, the optimal hedge ratios and the hedging effectiveness.FindingsThe authors find that without confirmation bias, during the two sub periods, the expectations of optimistic and pessimistic trader’s seem to convergence toward zero. However, when confirmation bias is particularly strong, the average distance between these two expectations are farer. The authors further show that, with and without confirmation bias, the optimal weights (the optimal hedge ratios) are found to be lower (higher) for all pairs of financial market during the COVID-19 period as compared to the pre-COVID-19 period. The authors also document that the stronger the confirmation bias is, the lower the optimal weight and the higher the optimal hedge ratio. Moreover, results reveal that the values of the optimal hedge ratio for optimistic and pessimistic traders affected or not by the confirmation bias are higher during the COVID-19 period compared to the estimates for the pre-COVID period and inversely for the optimal hedge ratios and the hedging effectiveness index. Indeed, either for optimists or pessimists, the presence of confirmation bias leads to higher optimal hedge ratio, higher optimal weights and higher hedging effectiveness index.Practical implicationsThe findings of the study provided additional evidence for investors, portfolio managers and financial analysts to exploit confirmation bias to make an optimal portfolio allocation especially during COVID-19 and non-COVID-19 periods. Moreover, the findings of this study might be useful for investors as they help them to make successful investment decision in potential hedging strategies.Originality/valueFirst, this is the first scientific work that conducts a stochastic analysis about the impact of emotional biases on the estimated returns and the expectations of optimists and pessimists in cryptocurrency and commodity markets. Second, the originality of this study stems from the fact that the authors make a comparative analysis of hedging behavior across different markets and different periods with and without the impact of confirmation bias. Third, this paper pays attention to the impact of confirmation bias on the expectations and hedging behavior in cryptocurrencies and commodities markets in extremely stressful periods such as the recent COVID-19 pandemic.

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“…Some scholars study the role of advertising, for example, Zhang (2006), Mian et al (2018), Ivaldi and Muller‐Vibes (2018), Eliaz and Spiegler (2020), Bagchi et al (2020), Chernonog (2020), and Schroeder et al (2021). Trabucchi et al (2017) explain why advertising is typically applied by a platform and their results highlight that the platform advertises to capture the information of the consumers, and then leverage this information to provide customized advertising.…”

Section: Related Literaturementioning

confidence: 99%

Choice of pricing and advertising schemes for a two‐sided platform

2021

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This paper examines the pricing and choice of advertising schemes for a two‐sided platform considering two business models, each with two advertising schemes. In the “1‐n” model, the prices on the provider side are the same in the two schemes; however, the price in the “1‐1“ model is always higher under the “HA” scheme. The results suggest that the preferred choice for the platform regarding the advertising schemes is the same as that in the two models. We extend our model in several directions and draw some management insights for a two‐sided platform for the platform operator.

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Strategic Implications of Confirmation Bias‐Inducing Advertising

Cited by 6 publications

References 61 publications

Impacts of barter exchange and decision biases in a two‐level supply chain under pull contract

Impacts of barter exchange and decision biases in a two‐level supply chain under pull contract

Impact of the confirmation bias on returns, expectations and hedging of optimistic and pessimistic traders before and during COVID-19 pandemic

Choice of pricing and advertising schemes for a two‐sided platform

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