Newsvendor Experiments Research Articles

Analyzing learning effects in the newsvendor model by probabilistic methods

In this paper, we discuss discrete choice theory and show how this theory can be used to quantify learning effects in experimental studies. We argue why the ordering quantities in newsvendor experiments should follow a multinomial logit distribution. We provide a robustness analysis to explain that the standard conditions for logit distributions can be relaxed considerably. A main finding is that when optimal parameter values are inferred from the empirical data, the model predicts observed orders well. This provides empirical evidence for a multinomial logit distribution in such experiments. Finally, we analyze the learning effect using the experimental data collected by Bolton et al. (2012).

Pull-to-center is not just for newsvendors.

The pull-to-center effect is a systematically observed suboptimal behavior in newsvendor experiments. Various explanations have been forward for this phenomenon, some of which are based on structural properties of the task while others are based upon the inventory context of the problem. To help distinguish between these two types of explanations, we compare behavior in a newsvendor game to behavior in a new, mathematically isomorphic, price gouging game. Our laboratory experiments replicate the standard results for newsvendors and yield the equivalent pattern in the price gouging game. This suggests previously observed newsvendor behavior is driven by structural aspects of the task consistent with models like prospect theory and impulse balance rather than context specific explanations pertaining to inventory management.

Revisiting the Causes of the Pull-to-Centre Effect: Evidence From China.

Prior experimental studies have shown that individuals' actual ordering decisions significantly deviate from the theoretical optimum in newsvendor problems and show the robust pull-to-centre (PTC) effect. Several human behaviours have been confirmed to be the causes of the PTC. However, most newsvendor experiments have been conducted in multicultural countries (e.g., the United States and Germany). As there exist mutual influences between culture and behaviour, in this study, we revisit the ordering biases in a monocultural country to examine the robustness of the PTC and whether the causes can still explain this phenomenon. Our results show that the PTC still prevails and heuristics still work. However, overconfidence cannot perfectly interpret the PTC in China for probable inconsistent confidence levels in individual judgments and decisions. Moreover, the “centre" may no longer be the mean demand but the average value of the realised demand. We explain these changes from the perspective of cultural differences. To be more specific, collectivism, holistic style, and Doctrine of the Mean play vital roles in Chinese newsvendors' decisions.

Prospect Theory and the Newsvendor Problem with Mental Accounting

The manner in which economic outcomes are coded in a value function is critical because it has substantial influence on the evaluation of risky choices. In this paper, we formulate multiple mental accounts in a nonlinear value function and propose a newsvendor problem with mental accounting to predict and explain pull-to-center phenomenon. We show that the distinctive predictions of the proposed model come from the value function with mental accounting. We identify the individual and combined effects of loss aversion, risk aversion, and risk seeking on shaping newsvendor ordering behavior. Our work demonstrates that prospect theory can explain the decision bias and ordering behavior observed in newsvendor experiments. We also provide some additional insights to explain the studies in the literature.

Inventory Control When Selling to Human Newsvendors

We develop inventory control strategies for a supplier who is selling a product to a group of human newsvendors. Recent research in newsvendor experiments using human subjects revealed significant behavioral tendencies in the decision making processes of human newsvendors. If the supplier would incorporate these behavioral tendencies while managing her inventories, her costs would be significantly reduced. Using data from our own experiments, we estimate the possible reductions in supplier costs and determine the factors that significantly impact it. We observe a significant improvement in the supplier’s inventory decision if she estimates the demand distribution with a model that captures the anchoring tendencies instead of assuming aggregate randomness. As the model selection relies much on the data, it is an important task to determine whether the retailers are mean-anchoring, demand-chasing, both, or neither. In addition, we observe that the information about retailers’ behaviors is more beneficial for the supplier when the end-customer demands are more variable. It is certain that more precise information on the data will lead to a better inventory decision for suppliers. The information includes the retailers’ behavioral tendencies, individual-specific order behaviors, and the variability of end-customer demands.

A Meta‐Analysis of Newsvendor Experiments: Revisiting the Pull‐to‐Center Asymmetry

The field of behavioral operations has produced a rich tradition of experiments in newsvendor decision‐making. Our study provides a meta‐analysis of 24 papers in this research area; we confirm that the pull‐to‐center (PtC) effect, where average order quantities in a sample lie in between average demand and optimal order quantities, is a very stable observable phenomenon across studies. However, we also show that the asymmetry in the PtC effect between high‐margin and low‐margin conditions varies significantly from study to study; factors that allow predicting the extent and direction of the PtC asymmetry include the likelihood of obtaining losses, the way underage costs are presented to subjects, and the existence of a decision support system. We validate these factors using a controlled experiment. In conclusion, the PtC asymmetry appears less as a fundamental attribute of human behavior, but rather as a function of the design aspects of the experiment.

Modeling Newsvendor Behavior: A Prospect Theory Approach

Problem definition: Studies have shown that the behavior of subjects in newsvendor experiments is not consistent with expected profit maximization—an assumption that is often made in operations management literature. Although prospect theory has been established as a popular model of behavioral decision making under uncertainty, it was considered to be inconsistent with observed newsvendor behavior (in particular, the pull-to-center effect) until a recent study by Long and Nasiry [Long X, Nasiry J (2015) Prospect theory explains newsvendor behavior: The role of reference points. Management Sci. 61(12):3009–3012.] proposed a prospect theory model that is consistent with the pull-to-center effect; however, this model’s ability in representing newsvendor behavior compared to other plausible prospect theory models is unexplored in the literature. This paper takes a more comprehensive approach in building several prospect theory-based newsvendor models and evaluates their competence in representing the observed newsvendor behavior. An important feature of these models is that they are not only consistent with the pull-to-center effect, but they can also, in accordance with the findings from recent research, accommodate individual-level heterogeneity in order quantities. Academic/practical relevance: Designing effective supply chain processes and inventory systems requires that the underlying models represent the observed newsvendor behavior reasonably well, especially in settings where most decisions are made by individuals. Our paper provides a rigorous basis for choosing a model when characterizing the decision making process of a newsvendor. Moreover, our novel approach to model building and testing could serve as a template for selecting appropriate prospect theory models in contexts other than the newsvendor problem. Methodology: Motivated by different types of reference points studied in the decision theory literature, we first build several newsvendor models that can theoretically accommodate individual-level heterogeneity in order quantities. Thereafter, using a multipronged approach based on theoretical criteria, goodness of fit, and empirical validity, we evaluate these models to determine the most appropriate model. Results: The model with mean demand as the stochastic reference point consistently outperforms other models, reducing the prediction error by as much as 31% on the experimental data used for this study. Moreover, all the empirical regularities considered in our paper are consistent only with this model. This suggests that mean demand is more likely to be adopted by experimental subjects as a reference point—perhaps because of its greater salience than the other plausible reference points considered. Managerial implications: Since decisions are made predominantly by human retailers in the emerging markets, we represent their behavior by the model with mean demand as the reference point and identify settings in which they could benefit from investing in decision support systems. We also demonstrate the benefits to a supplier from approximating his retailers’ behavior with this model relative to him using the other prospect theory models considered in this paper.

Describing decision bias in the newsvendor problem: A prospect theory model

In the newsvendor setting, we consider a prospect theory model with a stochastic-subjective reference point. The reference point is based on the pay-offs corresponding to the extreme values of demand; and, is influenced by the perception of costs associated with understocking and overstocking, and the pessimism level of the decision maker. Our prospect theory model describes the recent observations in the newsvendor experiments—the non-linear ordering behavior with respect to the profit margin and behavior at the extreme profit margins, in addition to the pull-to-center effect and asymmetry in ordering.

Ordering behavior in a newsstand experiment

We study ordering behavior in a multi-item newsvendor problem with resource constraints (the newsstand problem). We run a laboratory experiment of a newsstand problem with 95 undergraduate students, using a two-product portfolio while manipulating a budget constraint according to Abdel-Malek and Montanari (2005a)'s newsstand problem analysis. We observe level and poor demand chasing behaviors, as documented in newsvendor experiments. We also observe that more budget availability favors profit performance for a high profitability item and service level performance for a low profitability item. These results are supported by estimates of how participants assess leftover and shortage costs as well as their willingness to pay for additional resources. The results also highlight the role that service level preferences and the tradeoff between increased resources and profit performance play in ordering decisions. We discuss implications for inventory management and behavioral experiments of ordering problems.

Modeling Strategic Behavior in The Competitive Newsvendor Problem: An Experimental Investigation

This study experimentally investigates ordering behavior in the competitive newsvendor problem. We consider a duopoly market setting with two identical newsvendors selling the same perishable goods in a common market. Our experimental results show that average observed orders systematically deviate from the Nash equilibrium, and exhibit a similar pull‐to‐center pattern as in the classic non‐competitive newsvendor experiments: average orders fall below the Nash equilibrium in the high‐margin condition, and above the Nash equilibrium in the low‐margin condition. More importantly, the observed orders in the duopoly market are significantly higher than that in the non‐competitive newsvendor market, even in situations where standard inventory models predict no difference. We explain the ordering behavior using a strategic experience‐weighted attraction (EWA) model, which captures players' propensities for strategic thinking in game settings. Our empirical analysis suggests that the strategic EWA model generates more accurate predictions of future ordering behavior than an existing linear adaptive model without concerning strategic thinking. Further analysis shows that individuals are heterogeneous in their propensities to be a strategic player. Our research indicates the importance of modeling strategic behavior when analyzing behavioral decisions in competitive (game) environments.

Risk aversion and implicit shortage cost explain the Anchoring and Insufficient Adjustment bias in human newsvendors

The Anchoring and Insufficient Adjustment (AIA) bias has been observed in many newsvendor experiments, although a mathematical explanation for this behavior has previously eluded researchers. We show here that risk aversion coupled with an implicit shortage cost, both of which are well-known components of newsvendor decisions, comprehensively explains this behavior. We construct combinations of a risk-averse utility function and a shortage cost that explain the results from previously reported newsvendor experiments.

Evaluating Amazon's Mechanical Turk Workers for Making Profit-Maximizing Decisions with Decision Support

Online labor markets such as Amazon Mechanical Turk (MTurk) has attracted attention from behavioral researchers because they provide an ideal platform for conducting behavioral experiments; they provide immediate and inexpensive access to a large subject pool and necessitate less time and effort in conducting experiments. A number of studies replicate classic findings in judgment and decision making research and they suggest that online subjects make decisions to simple choice type questions that are not significantly different from traditional subjects. It is, however, not widely known if online subjects are capable of making more demanding quantitative and analytical decisions similarly to traditional subjects. In this paper, we attempt to empirically evaluate the validity of using MTurk workers for making profit-maximizing decisions with decision support. We replicate so-called “newsvendor experiment” in the domain of management studies where a decision maker sets a quantity to match an uncertain variable, and setting the quantity either too high or too low leads to a loss. We also test whether MTurk workers are able to utilize decision support given as phased information relevant to rational decisions. We find that MTurk workers behave similarly to more traditional subjects in physical laboratories before decision support is provided, but they suffer from random judgment errors more severely than offline subjects after decision support is provided, deteriorating performance. We also discuss possible individual differences and experiment design conditions that may have led to this performance loss among MTurk workers.

Gender Differences on Newsvendor Behavior

In this paper we present the results of a Newsvendor experiment. We study the differences between the ordering decisions of female and male subjects under low profit margin and high profit margin treatments. We show that female subjects’ ordering decisions are lower under both profit margins, with the difference being significant under high profit margin. Additionally, female newsvendors have higher order variability and affected more by demand chasing behavior.

A Meta-Analysis of Newsvendor Experiments: Revisiting the Pull-to-Center Asymmetry

The field of behavioral operations has produced a rich tradition of experiments in newsvendor decision making. Our study provides a meta-analysis of 19 papers in this research area; we confirm that the pull-to-center (PtC) effect, where average order quantities in a sample lie in between average demand and optimal order quantities, is a very stable observable phenomenon across studies. However, we also show that the asymmetry in the PtC effect between high-margin and low-margin conditions varies significantly from study to study; factors that allow predicting the extent and direction of the PtC asymmetry include the duration of the experiment, as well as the feedback provided to subjects. The PtC asymmetry thus appears less as a fundamental attribute of human behavior, but rather as depending on design aspects of the experiment.

Human Behavior in Newsvendor Decisions: A Comparative Study with Experimental Results

As decision makers do not make optimal decisions in practice despite the existence of optimal solutions in many models, there has been a rising interest in behavioral operations management recently. In this study, we aim for a comparative study to analyze the inventory decisions in Korea, America, and China, by conducting the same newsvendor experiment in Korea and compare the results with those of previous studies. From the comparative analysis, some national characteristics in decision-making processes have been observed but there is lowly significant difference in order quantities among the three groups. Korean students show lower level of understanding in demand distributions and tendencies of anchoring on the mean demand and being risk-averse. The finding that individuals make their own decisions differently based on their different behaviors suggests that we need to consider individual approach in analyzing human decision-making processes rather than adapting aggregate approach.

Newsvendor Experiment with Executive Participants: An Indian Case

The paper seeks to study the behavior of an executive newsvendor under stochastic ordering conditions. The participants have no prior knowledge of the newsvendor model. The demand pattern has been assumed to be normally distributed in both low and high profit situation. The results prove that the behavior of executive participants is very similar to the student newsvendors. Also no difference is observed on account of the change in country of the experiment.

Newsvendor decisions under supply uncertainty

We analyse the impact of supply uncertainty on newsvendor decisions. First, we derive a solution for a newsvendor facing stochastic supply yield, in addition to stochastic demand. While earlier research has considered independent uncertainties, we derive the optimal order quantity for interdependent demand and supply and provide a closed-form solution for a specific copula-based dependence structure. This allows us to give insights into how dependence impacts the newsvendor’s decision, profit and risk level. In addition to the theory, we present experimental results that show how difficult newsvendor decisions under supply uncertainty are for human subjects. In our experiment, the control group replicated a well-known newsvendor experiment, whereas the test group faced additional supply yield uncertainty. Comparison of these results shows that under low-profit condition, subjects are able to incorporate supply uncertainty quite well in their decisions. Under high-profit condition, the deviation from the optimum is much more significant. We discuss this asymmetry and also propose some ways to improve newsvendor decision-making.

Risk Aversion and Implicit Shortage Cost Explain the Anchoring and Insufficient Adjustment Bias in Human Newsvendors

Anchoring and Insufficient Adjustment (AIA) bias has been observed in many newsvendor experiments, although a mathematical explanation for this behavior has previously eluded researchers. We show that risk aversion coupled with an implicit shortage cost, both of which are well-known components of newsvendor decisions, comprehensively explains this behavior. We construct combinations of a risk averse utility function and a shortage cost that explain the results from Schweitzer and Cachon (2000), the first and the most-cited study in newsvendor experiments.

A Quantal Choice 'Paradox' in a News Vendor Experiment: The Dominant Anchoring Effect

Experimental newsvendor studies have shown that mean order quantities deviate from the normative predictions. In an effort to explain this phenomenon, a number of behavioral models have been proposed that can accurately account for this mean ordering behavior. However, an often overlooked result of newsvendor experiments is that order quantities exhibit considerable variability, despite the fact that price and cost parameters are constant. In this paper, we develop a simple behavioral model that predicts both mean order quantities and order variability. We begin by first describing our forecast anchoring model, which relies on a combination of simple decision heuristics, rather than an expected utility approach. We then fit the model by the generalized method of moments to a well-known newsvendor experimental data set. The estimated model parameters are used to generate predictions for ordering decisions in a separate external newsvendor data set, as an out-of-sample test. We find that our forecast anchoring model can predict both the mean and variability of order quantities well. Furthermore, as a robustness check, we conduct our own newsvendor experiment, which considers a unique setting with asymmetric two-point demand. We show that our model continues to fit ordering decisions well, whereas other models are not robust enough to provide an accurate fit in this setting. Across the different data sets, we also find a consistent pattern of subjects tending to anchor heavily on their demand forecast when the product profit margin is high. Overall, our study provides a new perspective for explaining and predicting order variability observed in behavioral inventory decisions. Our model predictions can help the upstream supply chain party better anticipate the order variability from the downstream buyer and thus improve profitability.

Impact of Joint Decisions and Cognitive Dissonance on Prepositioning (Newsvendor) Decisions

Prepositioning of emergency supplies is a critical task for the success of humanitarian relief operations. However, little is known about how humanitarian practitioners actually make prepositioning decisions. In a laboratory (lab) experiment based on the Newsvendor model, humanitarian practitioners prepositioned emergency supplies of different importance. When making single item decisions, practitioners’ prepositioning behavior shows the pull-to-center effect observed in traditional Newsvendor experiments. When making decisions for two items of different importance, practitioners either increase or reduce the pull-to-center effect. In particular, practitioners made joint prepositioning decisions in either a cognitive dissonant treatment, where a high-importance item in a low-safety stock condition was joined with a low-importance item in a high-safety stock condition; or a cognitive consonant treatment, where a high-importance item in a high-safety stock condition was joined with a low-importance item in a low-safety stock condition. Results show that the importance of emergency items in joint decisions influences prepositioning behavior, with dissonant prepositioning decisions increasing the pull-to-center effect for high-importance items, and consonant prepositioning decisions reducing the pull-to-center effect for high-importance items. Neither dissonance nor consonance influence prepositioning behavior for low-importance items. Our research suggests that cognitive dissonance can influence joint prepositioning decisions in Newsvendor settings.