Can irrelevant benchmark information help when making business decisions under uncertainty? An empirical investigation of the newsvendor game

Abstract

Firms often compensate employees based on their relative performance in the most recent business period. These firms need to consider what type of performance information to share with their employees in order to obtain better outcomes in the long run, without diminishing staff motivation. In this paper, we empirically investigate the impact of sharing irrelevant benchmark “information” (e.g., information about the interim winner's performance) when individuals are making repeated decisions under uncertainty. The decision-making context used is the newsvendor problem, which is a canonical framework for operations management decision making. The newsvendor problem occurs in many business contexts, such as buying fashion goods for retail, setting safety stock levels, setting target inventory levels for perishable goods, selecting the right capacity for a service facility, and overbooking customers. Theoretically, information about the interim winner's performance has no value for making improved decisions in future rounds, and it might even be misleading. Surprisingly, we find that displaying such irrelevant benchmark information results in significantly improved decisions overall, as compared to a control group; this additional display may motivate participants to perform better. We also identify two personality traits related to impulsivity which moderate this positive information display effect.