Impact of decision style on newsvendor ordering behaviors: mean anchoring, demand chasing and overconfidence

Abstract

Prior experimental studies have shown that individuals’ actual ordering decisions significantly deviate from theoretically-proved optimums in newsvendor problems. Several ordering behaviors like mean anchoring, demand chasing, reference dependence, mental accounting and overconfidence have been demonstrated to be the main causes for such deviations. However, less attention has been focused on the impact of decision style on ordering behaviors. To address such challenging issue, we conduct a between-subjects experiment and compare decision results between different groups of individuals, who are characterized by their decision styles, i.e., rational style and experiential style, as well as their tendencies to the three typical behaviors, i.e., mean anchoring, demand chasing and overconfidence. We show that individuals with high rational style or low experiential style can make better inventory order decisions. Furthermore, decision style and profit margin conditions are demonstrated to actually affect individuals’ tendencies to mean anchoring, demand chasing and overconfidence, which subsequently affects their order decisions. More importantly, compared to mean anchoring and demand chasing, overconfidence is identified as a dominated factor in affecting the order decisions. This research sheds light on how to select right inventory managers and how to improve their ordering decision performance more efficiently through recognizing the impact of decision style and their behavioral tendencies in different profit margin conditions in the newsvendor problem.

Appendices

Appendix A: Proof of Eq. (2)

Taking the first-order derivative of ${\rm E}(\varPi (q,D))$ expressed in Eq. (1) with respect to q, we have

$$ \frac{{\partial {\rm E}(\varPi (q,D))}}{\partial q} = (p - c + g) - (p - s + g)F(q) . $$

(A.1)

Subsequently, through the second-order derivative of ${\rm E}(\varPi (q,D))$ with respect to q, we obtain $\frac{{\partial^{2} {\rm E}(\varPi (q,X))}}{{\partial q^{2} }} = - (p - s + g)f(q) < 0$.

Therefore, by solving the first-order condition $\frac{\partial E(\varPi (q,X))}{\partial q} = 0$, we can obtain the optimal order quantity

$$ q^{*} = F^{ - 1} \left( {\frac{p - c + g}{p + g - s}} \right) . $$

(A.2)

This completes the proof of Eq. (2). □

Appendix B: questionnaire according to REI-40

Instructions: Using the following scale, please rate the extent of each item for you.

1	2	3	4	5
Definitely				Definitely not
True of myself				Not true of myself

Rationality scale

Rational Ability

• 1. I am not that good at figuring out complicated problems*.

• 2. I am not very good at solving problems that require careful logical analysis*.

• 3. I am not a very analytical thinker*.

• 4. Reasoning things out carefully is not one of my strong points*.

• 5. I do not reason well under pressure*.

• 6. I am much better at figuring things out logically than most people.

• 7. I have a logical mind.

• 8. I have no problem thinking things through carefully.

• 9. Using logic usually works well for me in figuring out problems in my life.

• 10. I usually have clear, explainable reasons for my decisions.

Rational Engagement

• 11. I try to avoid situations that require thinking in depth about something*.

• 12. I enjoy intellectual challenges.

• 13. I do not like to have to do a lot of thinking*.

• 14. I enjoy solving problems that require hard thinking.

• 15. Thinking is not my idea of an enjoyable activity*.

• 16. I prefer complex problems to simple problems.

• 17. Thinking hard and for a long time about something gives me little satisfaction*.

• 18. I enjoy thinking in abstract terms.

• 19. Knowing the answer without having to understand the reasoning behind it is good enough for me*.

• 20. Learning new ways to think would be very appealing to me.

Experientiality Scale

Experiential Ability

• 21. I do not have a very good sense of intuition*.

• 22. Using my gut feelings usually work well for me in figuring out problems in my life.

• 23. I believe in trusting my hunches.

• 24. I trust my initial feelings about people.

• 25. When it comes to trusting people, I can usually rely on my gut feelings.

• 26. If I were to rely on my gut feelings, I would often make mistakes*.

• 27. I hardly ever go wrong when I listen to my deepest gut feelings to find an answer.

• 28. My snap judgments are probably not as good as most people’s*.

• 29. I can usually feel when a person is right or wrong, even if I can’t explain how I know.

• 30. I suspect my hunches are inaccurate as often as they are accurate*.

Experiential Engagement

• 31. I like to rely on my intuitive impressions.

• 32. Intuition can be a very useful way to solve problems.

• 33. I often go by my instincts when deciding on a course of action.

• 34. I do not like situations in which I have to rely on intuition*.

• 35. I think there are times when one should rely on one’s intuition.

• 36. I think it is foolish to make important decisions based on feelings*.

• 37. I do not think it is a good idea to rely on one’s intuition for important decisions*.

• 38. I generally don’t depend on my feelings to help me make decisions*.

• 39. I would not want to depend on anyone who described himself or herself as intuitive.

• 40. I tend to use my heart as a guide for my actions.

Note: Labels should be removed and items are randomized prior to administration. Items marked with an asterisk (*) should be reverse coding prior to scoring.