Task Decomposition and Newsvendor Decision Making

Abstract

We separate newsvendor order decisions into point forecasts, uncertainty judgments, and service level decisions in a behavioral laboratory experiment. Structuring order decisions in such a way can lead to performance improvements, and enable us to more closely examine these components. Point forecasts are influenced by the underlying overage and underage cost parameters, and suffer from demand chasing. Uncertainty judgments are subject to overconfidence, and service level decisions suffer from a cognitive dissonance bias where service levels are rarely set below 50 percent. In a set of additional experiments, we show that these biases can be partially mitigated by properly structuring and framing these lower level judgments and decisions.