Newsvendor overconfidence and advertising

Abstract

Overconfidence, as the most robust behavioral bias, has been confirmed to be a leading cause of human newsvendors’ pull-to-center (PTC) ordering bias. Most existing studies have focused solely on inventory decisions, overlooking the complexities that arise from the interface between operations management (OM) and marketing. As marketing and OM become increasingly intertwined and make decision-making more challenging, this paper examines the impacts of overconfidence on newsvendor’s joint ordering and advertising decisions. Our study uncovered new decision biases that arise from overconfidence and have not been previously identified. Specifically, we found that overconfidence leads to over-advertising and a novel ordering behavior called the leapfrogging effect, where inventory can jump from underordering to overordering for medium-high margin products. Furthermore, our study shows that overconfidence can still result in a PTC-like effect for newsvendors who advertise. We also found that overconfidence has a more detrimental effect on profits for newsvendors with advertising. These findings highlight the need for overconfident newsvendors to be aware of choosing advertising because advertising can harm profits for overconfident newsvendors, while consistently improving profits for well-calibrated newsvendors. Overall, our study emphasizes the need to consider the effects of behavioral biases on decision-making in more complex contexts, particularly in the operations-marketing interface.