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The human element in inventory decision making under uncertainty - a review of experimental evidence in the newsvendor model
... Within BOM, the topic of ordering decisions has emerged as a major focal area . While normative research has investigated this phenomenon using computational methods, they have been inadequate to fully explain human decision-making (Kremer and Minner, 2008). This has prompted researchers to draw inspiration from other fields of research such as economics, finance, psychology, marketing, sociology, medicine and accounting, which had all embraced research on human behavior prior to the emergence of BOM (Bendoly et al., 2006). ...
... Reviews of the existing literature on certain types of behavioral inventory and ordering decisions have been published as chapters in edited books. One of the earliest works focuses exclusively on behavioral experiments focusing on the newsvendor problem (Kremer and Minner, 2008). The recently released The Handbook of Behavioral Operations also contains a chapter on behavioral inventory decisions . ...
... The 90 papers deemed to be relevant through this process were cross checked with reference lists of significant preceding works in this research domain. More specifically, we cross checked the reference lists of the two review chapters mentioned earlier Kremer and Minner, 2008) and seminal literature (Benzion et al., 2008;Bolton and Katok, 2008;Bolton et al., 2012;Bostian et al., 2008;Croson and Donohue, 2006;Lurie and Swaminathan, 2009;Schweitzer and Cachon, 2000;Steckel et al., 2004) and publications over the past couple of years (Castañeda and Gonçalves, 2018;D'Urso et al., 2017;Schultz et al., 2018;Stangl and Thonemann, 2017;Tokar et al., 2016;Villa and Castañeda, 2018;Zhang and Siemsen, 2019;Zhao and Zhao, 2018). This uncovers 11 papers that are not captured by our original search terms. ...
Purpose
The success of a supply chain is highly reliant on effective inventory and ordering decisions. This paper systematically reviews and analyzes the literature on inventory ordering decisions conducted using behavioral experiments to inform the state-of-the-art.
Design/methodology/approach
This paper presents the first systematic review of this literature. We systematically identify a body of 101 papers from an initial pool of over 12,000.
Findings
Extant literature and industry observations posit that decision makers often deviate from optimal ordering behavior prescribed by the quantitative models. Such deviations are often accompanied by excessive inventory costs and/or lost sales. Understanding how humans make inventory decisions is paramount to minimize the associated consequences. To address this, the field of behavioral operations management has produced a rich body of research on inventory decision-making using behavioral experiments. Our analysis identifies primary research clusters, summarizes key learnings and highlights opportunities for future research in this critical decision-making area.
Practical implications
The findings will have a significant impact on future research on behavioral inventory ordering decisions while informing practitioners to reach better ordering decisions.
Originality/value
Previous systematic reviews have explored behavioral operations broadly or its subdisciplines such as judgmental forecasting. This paper presents a systematic review that specifically investigates the state-of-the-art of inventory ordering decisions using behavioral experiments.
... Order decisions in the newsvendor problem tend to be biased towards the anchor of mean demand, which we call the "mean anchor effect". For a recent review considering experimental studies of the newsvendor problem, see Kremer and Minner [81]. ...
... Acknowledgements ations research (see Bendoly et al. [7], Gans and Croson [50], Kremer and Minner [81], Katok [73], Hämäläinen et al. [64]). ...
... Since that seminal work of Schweitzer and Cachon (2000), the too-high/too-low pattern has received support by authors such as Bolton and Katok (2008), Bolton et al. (2012), Benzion et al. (2008), Rudi and Drake (2014), and Kremer et al. (2010). For an interesting overview, see Kremer and Minner (2008). Interestingly, the pattern has proved to be present across cultures (e.g., Cui et al. 2013, or Feng et al. 2011) and gender (de Véricourt et al. 2013, even though men and women show different average order behavior. ...
The newsvendor problem is an economic decision problem with an interesting degree of complexity while still providing a quite simple and intuitive normative solution. Therefore, one should expect that decision makers find the optimal solution at least when they learn over time and become familiar with the problem. However, this is not the case. On average, decision makers in newsvendor settings tend to order too little when confronted with high-profit goods and too much in the case of low-profit goods. This inefficiency is well documented through a variety of laboratory experiments assuming symmetric demand functions and is known as pull-to-mean effect. We analyze data from an experiment that is based on an asymmetric demand function and are able to discriminate among the possible focal points, namely, mean demand, median demand, and the middle of possible demand. Interestingly, the result is not a pure pull-to-mean effect. We show that the adaptive learning model is able to better explain the ordering behavior than the models of anchoring and insufficient adjustment, demand chasing, the regretting newsvendor, reference dependence, or bounded rationality not only on the aggregate but also on the individual level. In particular, we find out that the top ranking of the adaptive learning model is not the result of mixing individual behavior according to the explanatory models with less parameters. Furthermore, we are able to improve the explanatory and predictive power of the adaptive learning model by modifying the demand indicator that is used.
... Order decisions in the newsvendor problem tend to be biased towards the anchor of mean demand, which we call the "mean anchor effect". For a recent review considering experimental studies of the newsvendor problem, see Kremer and Minner [19]. ...
... While here is a good deal of heterogeneity in the individual ordering patterns behind anchoring bias (Moritz 2008), a common feature involves adaptive learning-by-doing behavior that insufficiently adjusts orders to the optimum, even when the experiment provides demand distribution and profit information amenable to deductive insight. The data shows fit with bounded rationality models of adaptive learning (Bostian, Holt and Smith 2008), decision noise and optimization error (Su 2008), and overconfidence bias in which subjects underestimate the variance in demand (Croson, Croson and Ren 2008). 1 1 For a comprehensive survey of newsvendor experiments, see Kremer and Minner (2008). Other recent work, using somewhat different methods for analyzing the newsvendor problem, also finds behavior that deviates from theory. ...
We compare how freshmen business students, graduate business students and experienced procurement managers perform on a simple inventory ordering task. We find that, qualitatively, managers exhibit ordering behavior similar to students, including biased ordering towards average demand. Experience, however, affects subjects’ utilization of information. The managers’ work experience seems most valuable when there is only historical demand data to guide decision making, while students better utilize analytical information and task training. As a result, when information necessary to solve the problem to optimality is added to historical information, students catch up to the managers, and students with classroom experience in operations management outperform managers.
One of the foundational models for the study of inventory management is the newsvendor problem. Since the newsvendor problem involving perishable goods, one application that might be very concerning nowadays is food inventory management. Particularly, the food and culinary industries face the problem associated with the setting: supply--demand mismatch which causes business performance reduction due to profit loss. Thus, the developing of mathematical models in the newsvendor problem could be the solution to the problem since it can provide a good insight to determine optimal order quantities.
However, inventory managers' order decision might deviate from the assumption in newsvendor setting which claims that individuals would make a rational decision that can maximize their utility and profit as well. Schweitzer & Cachon [1] is one of the earliest works that provides evidence of this deviation and concludes that there is a mismatch between newsvendor theory and experimental observations which causes non-optimal decisions due to the decision biases that occur in the newsvendor context. Thereafter, a growing number of studies in newsvendor problem have started to move toward experimental studies. However, most of the existing studies only involve students as the subject, leaving an important question of how the result of such studies can be implemented in the real world where the manager really works.
In this study, we conduct an experiment to investigate the inventory managers' order decision in newsvendor settings in small fast-food restaurants in Yogyakarta, Indonesia. Afterward, we conduct the same experiment with students to provide a structured comparison between manager and student on decision making in the newsvendor problem. After obtaining the order decision pattern, which is not optimal due to anchoring and insufficient adjustment bias that occur, this study will also come up with a debiasing strategy in the form of Decision Support System (DSS). The DSS we propose aims to provide an alternative order for the inventory manager so that the overall inventory performance can be improved. To prove the effectiveness of the DSS we propose, we will also conduct an experimental work to compare the result of the order decisions with and without DSS provided.
One striking behavioral phenomenon is the ”pull-to-center” bias in the newsvendor game: facing stochastic demand, subjects tend to order quantities between the expected profit maximizing quantity and mean demand. We show that the impulse balance equilibrium, which is based on a simple ex-post rationality principle along with an equilibrium condition, predicts the pull-to-center bias and other, more subtle observations in the laboratory newsvendor game.
In the classical "newsboy problem", one determines the optimum order quantity to maximize the expected profit. This paper considers the newsboy problem under two new objectives. The relevance of the first objective-"maximizing expected utility"-is well established in decision theory. This paper develops a group of formulas for handling the partial moments arising from adopting this objective, and these formulas are potentially useful to many other management models involving partial moments. The second objective-"maximizing the probability of achieving a budgeted profit"-is commonly adopted by managers but largely ignored in the literature. The analysis reveals some interesting results for determining the optimum order quantity under this objective.
While many firms and researchers have developed various sup-ply chain solutions, there are many underlying reasons why these solutions have not been adopted in practice. Some key reasons, as articulated by Lee and Billington (1992), include organizational barriers, coordination challenges among marketing, manufacturing, and logistics, technical challenges in the area of information systems, as well as conflicting supply chain performance met-rics. Other key reasons are due to alternative performance measures besides total expected relevant cost, which include sales target, product substitution, product clearance, sales per square foot, etc. In order to understand how these alternative performance measures affect the supply chain solution, we make an initial attempt to analyze how alternative measures would affect the simplest form of inventory policy, namely, the newsvendor solution. To identify various alternative measures and to explore how such order decisions are made, we con-ducted a simple experiment by giving a single-period inventory problem to 250 MBA students and 6 professional buyers who order fashion items. We observed that both groups select their order quantities less than the newsvendor solu-tion and made their ordering decisions based on various specific performance metrics besides total expected cost. These observations have motivated us to analyze how these performance metrics would affect the ordering decision. Our analysis indicates that, under these performance metrics, it is rational for the decision maker to order less than the newsvendor solution.
In the newsvendor problem a decision maker orders inventory before a one period selling season with stochastic demand. If too much is ordered, stock is left over at the end of the period, whereas if too little is ordered, sales are lost. The expected profit-maximizing order quantity is well known, but little is known about how managers actually make these decisions. We describe two experiments that investigate newsvendor decisions across different profit conditions. Results from these studies demonstrate that choices systematically deviate from those that maximize expected profit. Subjects order too few of high-profit products and too many of low-profit products. These results are not consistent with risk-aversion, risk-seeking preferences, Prospect Theory preferences, waste aversion, stockout aversion, or the consequences of underestimating opportunity costs. Two explanations are consistent with the data. One, subjects behave as if their utility function incorporates a preference to reduce ex-post inventory error, the absolute difference between the chosen quantity and realized demand. Two, subjects suffer from the anchoring and insufficient adjustment bias. Feedback and training did not mitigate inventory order errors. We suggest techniques to improve decision making.
The coordination of supply chains by means of contracting mechanisms has been extensively explored theoretically but not tested empirically. We investigate the performance of three commonly studied supply chain contracting mechanisms: the wholesale price contract, the buyback contract, and the revenue-sharing contract. The simplified setting we consider utilizes a two-echelon supply chain in which the retailer faces the newsvendor problem, the supplier has no capacity constraints, and delivery occurs instantaneously. We compare the three mechanisms in a laboratory setting using a novel design that fully controls for strategic interactions between the retailer and the supplier. Results indicate that although the buyback and revenue-sharing contracts improve supply chain efficiency relative to the wholesale price contract, the improvement is smaller than the theory predicts. We also find that although the buyback and revenue-sharing contracts are mathematically equivalent, they do not generally result in equivalent supply chain performance.
The tendency of orders to increase in variability as one moves up a supply chain is commonly known as the 'bullwhip effect.' We study this phenomenon from a behavioral perspective in the context of a simple, serial, supply chain subject to information lags and stochastic demand. We conduct two experiments on two different sets of participants. In the first we find the bullwhip effect still exists when normal operational causes (e.g., batching, price fluctuations, demand estimation, etc.) are removed. The persistence of the bullwhip effect is explained, to some extent, by evidence that decision-makers consistently under-weight the supply line when making order decisions. In the second experiment we find that the bullwhip, and the underlying tendency of underweighting, remains when information on inventory levels is shared. However, we observe that inventory information helps somewhat to alleviate the bullwhip effect by helping upstream chain members better anticipate and prepare for fluctuations in inventory needs downstream. These experimental results support the theoretically suggested notion that upstream chain members stand to gain the most from information sharing initiatives.
This paper investigates repetitive purchase decisions of perishable items in the face of uncertain demand (the newsvendor problem). The experimental design includes: high, or low profit levels; and uniform, or normal demand distributions. The results show that in all cases both learning and convergence occur and are effected by: (1) the mean demand; (2) the order-size of the maximal expected profit; and (3) the demand level of the immediately preceding round. In all cases of the experimental design, the purchase order converges to a value between the mean demand and the quantity for maximizing the expected profit.
Operations management (OM) and human resources management (HRM) have historically been very separate fields. In practice, operations managers and human resource managers interact primarily on administrative issues regarding payroll and other matters. In academia, the two subjects are studied by separate communities of scholars publishing in disjoint sets of journals, drawing on mostly separate disciplinary foundations. Yet, operations and human resources are intimately related at a fundamental level. Operations are the context that often explains or moderates the effects of human resource activities such as pay, training, communications and staffing. Human responses to operations management systems often explain variations or anomalies that would otherwise be treated as randomness or error variance in traditional operations research models. In this paper, we probe the interface between operations and human resources by examining how human considerations affect classical OM results and how operational considerations affect classical HRM results. We then propose a unifying framework for identifying new research opportunities at the intersection of the two fields.
En la UE se ha estimado que los costes de la congesti�n representan el 2% de su PIB y que el coste de la poluci�n del aire y ruido supera el 0,6% del PIB, siendo alrededor del 90% de los mismos ocasionados por el transporte terrestre. Ante este hecho y el continuo aumento de la demanda del transporte privado frente al p�blico para los desplazamientos, muchos abogan por una conjunci�n de medidas tanto restrictivas como alternativas al uso del coche. Dentro de las primeras se encuentra el establecimiento de un peaje o una tarifa por el uso de las carreteras, medida que aunque desde el punto de vista de la Teor�a Econ�mica es la manera m�s eficiente para corregir el fallo de mercado que supone la congesti�n, desde la visi�n de pol�ticos y del p�blico no goza de gran aceptaci�n. En este trabajo se pretende hacer una simulaci�n de los efectos que tendr�a sobre el bienestar social de la implantaci�n de una medida de este tipo en la Bah�a de C�diz. In the European Union it has been estimated that the congestion cost are the 2% of the gross domestic product and the cost of pollution and noise is over 0,6%, olso it is known that the 90% of this cost are caused by overland transport. For this reason and for the always increasing demand of private transport, there are professionals who thinks that the solution have to be restrictive measures added to alternatives to the car. road pricing is a restrictive measures that for the economic theory is the most efficient way to solve congestion cost but for politicians and user of transport is not always accepted. In this study we are going to simulate road pricing for commuters in the Bah�a of C�diz and then it will be estimated welfare effects.
It is well established that human newsvendors tend to order insufficient inventory in high-margin situations, possibly due to implicit risk aversion. In this paper, we investigate the use of framing to change newsvendors’ risk preference in order to induce them to make better ordering decisions. Through an exploratory experiment and five different treatments of the newsvendor problem, we found risk reversal only in the treatments with one question. In the other four treatments and the exploratory experiment, we asked multiple questions and found no evidence of risk reversal. Thus, we conclude that risk reversal cannot reliably be used without pretesting and that behavioral theories need to be tested in context. Finally, we reaffirm research showing that relying on averages can mask the heterogeneity of human decision-making.
Many decisions are based on beliefs concerning the likelihood of uncertain events such as the outcome of an election, the guilt of a defendant, or the future value of the dollar. Occasionally, beliefs concerning uncertain events are expressed in numerical form as odds or subjective probabilities. In general, the heuristics are quite useful, but sometimes they lead to severe and systematic errors. The subjective assessment of probability resembles the subjective assessment of physical quantities such as distance or size. These judgments are all based on data of limited validity, which are processed according to heuristic rules. However, the reliance on this rule leads to systematic errors in the estimation of distance. This chapter describes three heuristics that are employed in making judgments under uncertainty. The first is representativeness, which is usually employed when people are asked to judge the probability that an object or event belongs to a class or event. The second is the availability of instances or scenarios, which is often employed when people are asked to assess the frequency of a class or the plausibility of a particular development, and the third is adjustment from an anchor, which is usually employed in numerical prediction when a relevant value is available.
This paper examines the use of market-valuation models in analysing stochastic inventory problems. As an example, the one-period newsboy problem is treated using the capital asset pricing model (CAPM). It is pointed out that, unlike other working-capital decisions, the use of CAPM to analyse inventory problems need not imply conflicting assumptions. The resulting optimal policy is characterized and is compared with the classical expected benefit maximization framework. It is shown that when the relevant risk of the inventory investment is considered, results are dramatically different.
In framing studies, logically equivalent choice situations are differently described and the resulting preferences are studied. A meta-analysis of framing effects is presented for risky choice problems which are framed either as gains or as losses. This evaluates the finding that highlighting the positive aspects of formally identical problems does lead to risk aversion and that highlighting their equivalent negative aspects does lead to risk seeking. Based on a data pool of 136 empirical papers that reported framing experiments with nearly 30,000 participants, we calculated 230 effect sizes. Results show that the overall framing effect between conditions is of small to moderate size and that profound differences exist between research designs. Potentially relevant characteristics were coded for each study. The most important characteristics were whether framing is manipulated by changing reference points or by manipulating outcome salience, and response mode (choice vs. rating/judgment). Further important characteristics were whether options differ qualitatively or quantitatively in risk, whether there is one or multiple risky events, whether framing is manipulated by gain/loss or by task-responsive wording, whether dependent variables are measured between- or within- subjects, and problem domains. Sample (students vs. target populations) and unit of analysis (individual vs. group) was not influential. It is concluded that framing is a reliable phenomenon, but that outcome salience manipulations, which constitute a considerable amount of work, have to be distinguished from reference point manipulations and that procedural features of experimental settings have a considerable effect on effect sizes in framing experiments.
In this paper we study the problem of balancing two desirable but conflicting objectives in the newsvendor model. The standard objective in the newsvendor model is the expected profit maximization. Another objective (known as the "satisficing"--or, "aspiration-level"--objective) that has been studied in the literature is the probability of exceeding a prespecified and fixed target profit level. Since it may not always be obvious what the fixed target profit level should be, we introduce a more flexible satisficing objective where the target does not have to be prespecified. Our satisficing/aspiration-level objective is defined as the probability of exceeding the expected profit and it is a "moving" target that is a function of the order quantity. We provide a discussion of the properties of the newly introduced probability maximization objective. As a departure from previous work where the individual objectives were considered in isolation, in this paper we develop a model that unifies and integrates the two objectives. We use a scalarization method to combine the standard objective of expected profit maximization with the new objective of maximizing the probability of exceeding the moving target. A decision framework is developed within compromise programming that involves minimizing a generalized distance function measuring the "distance" from an ideal point to the efficient frontier. Several examples illustrate the results.
“Crisis? What crisis?” could also have been an appropriate title for this paper. The OR/MS literature contains more than enough papers addressing the crisis in OR/MS to take the matter seriously, but it is not always clear exactly what is meant by crisis. The complaints usually concern the perceived gap between theory and practice, pointing out that there are too many theoretical and too few practice-oriented papers. This may well be true, but we suggest a slightly different view of the crisis, by hypothesizing that a ‘natural drift’ has occurred, i.e., that old-style OR has remained underdeveloped relative to its more purely theoretical and practical counterparts. To explain how this hypothesis arose, we provide an overview of the debate on professional concerns in OR/MS, and contrast it with Harvard Business Review papers providing a managerial perspective. We also explore the extent to which such a natural drift would be truly natural, by comparing the development of OR/MS to that of other professions....
This paper addresses the effects of the anticipation of regret on decision making under uncertainty. Regret is a negative, cognitively based emotion that we experience when realizing or imagining that our present situation would have been better, had we decided differently. The experience of post-decisional regret is for a large part conditional on the knowledge of the outcomes of the rejected alternatives. A series of studies is reviewed in which it is shown that whether or not decision makers expect post-decisional feedback on rejected alternatives has a profound influence on the decisions they make. These studies, focusing on choice between gambles, consumer decision making and interpersonal decision making, also show that anticipated regret can promote risk-averse as well as risk-seeking choices. This review of empirical studies is followed by a discussion of the conditions under which we can expect the anticipation of regret to take place. Copyright © 1999 John Wiley & Sons, Ltd.
This work empirically assesses the degree to which inventory decisions made by entrepreneurs and small businesses are informed by the logic underlying the newsvendor or base stock model and are influenced by the decision-maker's risk profile. We used a web- and email-based survey, combined with a telephone follow-up to elicit risk profiles, obtaining 51 usable responses. Our findings suggest that entrepreneurs do follow the newsvendor logic, but more so for high-margin than for best-selling products. We find that entrepreneurs' risk profiles are consistent with a key prediction from prospect theory, displaying risk aversion for profits and risk-seeking behavior for losses. Furthermore, we find that risk aversion for profits is associated with higher safety stocks, in contradiction to existing theory, and discuss several possible explanations for this finding.
This paper reports the results of an experiment to examine whether giving supply chain partners access to downstream inventory information is more effective at reducing bullwhip behavior, and its associated costs, than similar access to upstream inventory information. Bullwhip behavior refers to the tendency of orders to increase in variation as they are passed upstream in a supply chain (i.e., away from the final consumer). We use a controlled version of the Beer Distribution Game as the setting for our experiment, and vary the amount and location of inventory information shared across treatments. We first independently test whether sharing upstream or downstream inventory information helps reduce bullwhip behavior, and find that only downstream information sharing leads to significantly lower order oscillations throughout the supply chain. We then compare the reduction in order oscillations experienced by supply chain level and find that upstream supply chain members benefit the most from downstream information sharing. Copyright © 2005 John Wiley & Sons, Ltd.
We examine the impact of point of sale (POS) data sharing on ordering decisions in a multi-echelon supply chain. In particular, we focus on how exposure to POS data may help reduce the “bullwhip effect,” the tendency of orders to increase in variability as one moves up a supply chain. Theoretical studies have shown that exposure to POS data can lead to a reduction in the bullwhip effect when suppliers have no prior knowledge of the demand distribution. The benefit of sharing POS data in stable industries, where the demand distribution is commonly known, is less clear. We study this phenomenon from a behavioral perspective in the context of a simple, serial, supply chain subject to information lags and stochastic demand. We find, using a controlled simulation experiment, that sharing POS information does help reduce some components of the bullwhip effect in a stable demand setting, namely the order oscillation of upstream members. We offer one possible explanation for this improvement by examining the relationship between order decisions and demand line information.
This paper investigates the impacts of a secondary market where resellers can buy and sell excess inventories. We develop a two-period model with a single manufacturer and many resellers. At the beginning of the first period resellers order and receive products from the manufacturer, but at the beginning of the second period, they can trade inventories among themselves in the secondary market. We endogenously derive the optimal decisions for the resellers, along with the equilibrium market price of the secondary market. The secondary market creates two interdependent effect--a quantity effect (sales by the manufacturer) and an allocation effect (supply chain performance). The former is indeterminate; i.e., the total sales volume for the manufacturer may increase or decrease, depending on the critical fractile. The latter is always positive; i.e., the secondary market always improves allocative efficiency. The sum of the effects is also unclear--the welfare of the supply chain may or may not increase as a result of the secondary market. Lastly, we study potential strategies for the manufacturer to increase sales in the presence of the secondary market.
The effects of risk and risk aversion in the single-period inventory ("newsboy") problem are examined. Comparative-static effects of changes in the various price and cost parameters are determined and related to the newsboy's risk aversion. The addition of a random background wealth and of an increase in the riskiness of newspaper demand are also examined. Although many of the comparative effects generally are ambiguous, some fairly simple restrictions on preferences and/or risk increases are shown to lead to qualitatively deterministic results.
Introduction
We consider a company sourcing a product with short life cycle to stock using the framework of the newsvendor model. Traditionally, risk-neutral inventory managers are considered optimizing the expected cost or profit. But experimental findings state that the actual quantity ordered deviates from the optimal quantity derived from the classical newsvendor model.
Model
Recently, the newsvendor model with objectives different from maximizing expected profit has been an active field of research. Here, we propose a newsvendor model where the inventory manager can control internal and customer-oriented performance measures. The objective function is a convex combination of conditional expected values of low and high profits, respectively.
Results
We give a qualitative characterization of the optimal order quantity and the resulting performance measures in dependence of the model parameters. A risk-averse inventory manager cannot Pareto-dominate a risk-neutral or risk-taking inventory manager with respect to the expected profit and the level of product availability. Finally, the risk preferences of the inventory manager are expressed as a function of the profit value of the product with respect to the level of product availability and the probability of loss, respectively.
In recent years there have been several hundred studies within the rather narrowly-defined topic of information utilization in judgment and decision making. Much of this work has been accomplished within two basic schools of research, which we have labeled the “regression” and the “Bayesian” approaches. Each has its characteristic tasks and characteristic information that must be processed to accomplish these tasks. For the most part, researchers have tended to work strictly within a single approach and there has been minimal communication between the resultant subgroups of workers. Our objective here is to present a review and comparative analysis of these two approaches. Within each, we examine (a) the models that have been developed for describing and prescribing the use of information in decision making; (b) the major experimental paradigms, including the types of judgment, prediction, and decision tasks and the kinds of information that have been available to the decision maker in these tasks; (c) the key independent variables that have been manipulated in experimental studies; and (d) the major empirical results and conclusions. In comparing these approaches, we seek the answers to two basic questions. First, do the specific models and methods characteristic of different paradigms direct the researcher's attention to certain problems and cause him to neglect others that may be equally important? Second, can a researcher studying a particular substantive problem increase his understanding by employing diverse models and diverse experimental methods?
We investigate the effect of learning and communication on the bullwhip effect in supply chains. Using the beer distribution game in a controlled laboratory setting, we test four behavioral hypotheses – bounded rationality, experiential learning, systems learning, and organizational learning – by systematically manipulating training and communication protocols. We find that order variability decreases significantly in a setting in which participants start with hands-on experience, and are then allowed to formulate team strategies collaboratively. This result indicates that while training may improve individuals’ knowledge and understanding of the system, it does not improve supply chain performance unless supply chain partners are allowed to communicate and share this knowledge. Our results indicate that the bullwhip effect is, at least in part, caused by insufficient coordination between supply chain partners.
The single-period problem (SPP), also known as the newsboy or news-vendor problem, is to find the order quantity which maximizes the expected profit in a single period probabilistic demand framework. Interest in the SPP remains unabated and many extensions to it have been proposed in the last decade. These extensions include dealing with different objectives and utility functions, different supplier pricing policies, different news-vendor pricing policies and discounting structures, different states of information about demand, constrained multi-products, multiple-products with substitution, random yields, and multi-location models. This paper builds a taxonomy of the SPP literature and delineates the contribution of the different SPP extensions. This paper also suggests some future directions for research.
In this paper, we provide a perspective on why behavioral research is critical to the operations management (OM) field, what prior research exists, and what opportunities lie ahead. The use of human experiments in operations management is still fairly novel despite a small stream of publications going back more than 20 years. We develop a framework for identifying the types of behavioral assumptions typically made in analytical OM models. We then use this framework to organize the results of prior behavioral research and identify future research opportunities. Our study of prior research is based on a search of papers published between 1985 and 2005 in six targeted journals including the Journal of Operations Management, Manufacturing and Service Operations Management, Production and Operations Management, Management Science, Decision Sciences, and the Journal of Applied Psychology.
A review of inventory theory and probabilistic inventory modeling is presented. Inventory research, which is based on queueing theory, feedback systems, statistical decision theory, microeconomics, and multiperiod optimization is discussed. Sufficiently robust approaches to produce reliable trade-off assessments between service and other aspects of inventory management are investigated. The research shows that software packages are critically important for analysing operations research inventory models.
Analysis of decision making under risk has been dominated by expected utility theory, which generally accounts for people's actions. Presents a critique of expected utility theory as a descriptive model of decision making under risk, and argues that common forms of utility theory are not adequate, and proposes an alternative theory of choice under risk called prospect theory. In expected utility theory, utilities of outcomes are weighted by their probabilities. Considers results of responses to various hypothetical decision situations under risk and shows results that violate the tenets of expected utility theory. People overweight outcomes considered certain, relative to outcomes that are merely probable, a situation called the "certainty effect." This effect contributes to risk aversion in choices involving sure gains, and to risk seeking in choices involving sure losses. In choices where gains are replaced by losses, the pattern is called the "reflection effect." People discard components shared by all prospects under consideration, a tendency called the "isolation effect." Also shows that in choice situations, preferences may be altered by different representations of probabilities. Develops an alternative theory of individual decision making under risk, called prospect theory, developed for simple prospects with monetary outcomes and stated probabilities, in which value is given to gains and losses (i.e., changes in wealth or welfare) rather than to final assets, and probabilities are replaced by decision weights. The theory has two phases. The editing phase organizes and reformulates the options to simplify later evaluation and choice. The edited prospects are evaluated and the highest value prospect chosen. Discusses and models this theory, and offers directions for extending prospect theory are offered. (TNM)
Much of the experimental evidence concerning violations of von Neumann-Morgenstern expected utility theory has been collected fr om experiments designed with conventional theory in mind and does not provide direct tests of alternative models such as regret theory and disappointment theory. This paper reports and discusses recent evidence produced by an exp erimentspe cifically designed to test for the impacts of regret and disappointment, and to indicate their relative importance. Copyright 1987 by Royal Economic Society.
A preliminary experimental study of the relative impact of regret and disappointment on individual choice under uncert ainty is followed up and extended in various ways. Taken in conjuncti on with the earlier work, the new results provide further evidence of the limitations of von Neumann-Morgenstern expected utility theory a nd indicate the potential power of the alternative models discussed. It is argued that there is sufficient weight of evidence to encourage further systematic investigation. Copyright 1988 by The London School of Economics and Political Science.
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