The Behavioral Traps in Making Multiple, Simultaneous, Newsvendor Decisions

31 Pages Posted: 7 Sep 2018 Last revised: 25 Mar 2019

See all articles by Kay-Yut Chen

Kay-Yut Chen

University of Texas at Arlington

Shan Li

City University of New York - Narendra Paul Loomba Department of Management

Date Written: August 2, 2018

Abstract

This paper studied the impact of multiple, unrelated decisions on behavior in a newsvendor setting. We experimentally study and compare the performance of newsvendors who make two simultaneous newsvendor decisions versus one decision, and find some evidence that individuals who make two newsvendor decisions may exhibit lower performance than those who make a single newsvendor decision, depending on the margin conditions of the products that are grouped together. Specifically, we find significantly reduced performance for a high-margin product if it is grouped with a low margin product, but not so if it is grouped with another high margin product. We also find strong evidence to suggest stronger demand chasing behavior in the two-decision, compared to the one-decision scenario. Furthermore, while in our setting, the two newsvendor problems are independent to each other, order quantity decisions for one store are influenced by the decision made for the other store. We call it the cross influence. We develop a behavioral model, based on linear adjustment dynamics to capture the decision-making process. We conduct a set of Monte Carlo simulation studies and identify the key driver of performance differences between treatments to be the interaction between the cross influence effect and the pull-to-center with adjustment towards the optimum behavior. These results highlight the importance of assigning the right products, with the right margins, to managers, and managing the impact of cross influences.

Keywords: behavioral operations, experiments, complexity, newsvendor

JEL Classification: M2

Suggested Citation

Chen, Kay-Yut and Li, Shan, The Behavioral Traps in Making Multiple, Simultaneous, Newsvendor Decisions (August 2, 2018). Available at SSRN: https://ssrn.com/abstract=2817126 or http://dx.doi.org/10.2139/ssrn.2817126

Kay-Yut Chen

University of Texas at Arlington ( email )

Arlington, TX
United States

Shan Li (Contact Author)

City University of New York - Narendra Paul Loomba Department of Management ( email )

55 Lexington Avenue
New York, NY 10010
United States

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