Entrepreneurs and newsvendors : do small businesses follow the newsvendor logic when making inventory decisions?

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

Behavioral analyses of retailers’ ordering decisions

The main objective I pursue in this thesis is to better understand how different factors may independently and in combination influence retailers' ordering decisions under different supply chain structures (single agent and multi agent), different demand uncertainty (deterministic and stochastic), and different interaction among retailers (no interaction, competition and cooperation). I developed three different studies where I build on different formal management model and then run multiple behavioral studies to better understand subjects’ behavior. The first study analyzes order amplification in a single-supplier single-retailer supply chain. I used a behavioral experiment to test retailers’ orders under different ordering delays and different times to build supplier’s capacity. Results provide (i) a better understanding of the endogenous dynamics leading to retailers’ ordering amplification, and (ii) a description of subjects’ biases and deviation from optimal trajectories; despite subjects have full information about the system structure. The second study analyzes how order amplification can also take place when there is fierce retailer competition and limited supplier capacity. I study how different factors (different time to build supplier capacity, different levels of competition among retailers, different magnitudes of supply shortage and different allocation mechanisms) may independently and in combination influence retailers’ order in a system with two retailers under supply competition. Results show that (i) the bullwhip effect persists even when subjects do not have incentives to deviate, (ii) subjects amplify their orders in an attempt to build an unnecessary safety stock to respond to potential deviations from the other retailers, and (iii) retailers’ underperformance varies with the allocation mechanism used by the supplier. In the last study, I analyze retailers’ orders in a system where there is uncertainty in the final customer demand. I experimentally explore the effect of transshipments among retailers in a single-supplier multi-retailer supply chain. Specifically, I explore retailers’ orders under different profit and communication conditions. In addition, I integrate analytical and behavioral models to improve supply chain performance. Results show that (i) the persistence of common biases in a newsvendor problem (pull-to-center, demand chasing, loss aversion, psychological disutility), (ii) communication could improve coordination and may reduce demand chasing behavior, (iii) supply chain performance increases with the use of behavioral strategies embedded within a traditional optimization model, and (iv) dynamic heuristics improve overall coordination, outperforming a simple Nash Equilibrium strategy

An Experimental Comparison of News Vending and Price Gouging

The newsvendor problem is a workhorse model in operation management research. We introduce a related game that operates in the price dimension rather than the inventory dimension: the price gouging game. Using controlled laboratory experiments, we compare news vending and price gouging behavior. We replicate the standard pull-to-center effect for news vending and find that the equivalent pattern occurs with price gouging. Further, we find that the pull-to-center is asymmetric both for newsvendors and price gougers. More broadly, the experimental results reveal that choices are similar across the theoretically isomorphic games, suggesting that observed behavior in newsvendor experiments is representative of a broader class of games and not driven by the operations context that is often used in newsvendor experiments. Finally, we do not find evidence that behavior in these games is systemically affected by sex, risk attitude, or cognitive reflection

How can we improve the performance of supply chain contracts? An experimental Study

Although optimal forms of supply chain contracts have been widely studied in the literature, it has also been observed that decision makers fail to make optimal decisions in these contract setups. In this research, we propose different approaches to improve the performance of supply chain contracts in practice. We consider revenue sharing and buyback contracts between a rational supplier and a retailer who, unlike the supplier, is susceptible to decision errors. We propose five approaches to improve the retailer’s decisions which are in response to contract terms offered by the supplier. Through laboratory experiments, we examine the effectiveness of each approach. Among the proposed approaches, we observe that offering free items can bring the retailer’s effective order quantity close to the optimal level. We also observe that the retailer’s learning trend can be improved by providing him with collective feedbacks on the profits associated with his decisions

Observation bias: The impact of demand censoring on newsvendor level and adjustment behavior

In an experimental newsvendor setting we investigate three phenomena: Level behavior ? the decision-maker's average ordering tendency; adjustment behavior ? the tendency to adjust period-to-period order quantities; and observation bias ? the tendency to let the degree of demand feedback influence order quantities. We find that the portion of mismatch cost due to adjustment behavior exceeds the portion of mismatch cost due to level behavior in three out of four conditions. Observation bias is studied through censored demand feedback, a situation which arguably represents the majority of newsvendor settings. When demands are uncensored, subjects tend to order below the normative quantity when facing high margin and above the normative quantity when facing low margin, but in neither case beyond mean demand (a.k.a. the pull-to-center effect). Censoring in general leads to lower quantities, magnifying the below-normative level behavior when facing high margin but partially counterbalancing the above-normative level behavior when facing low margin, violating the pull-to-center effect in both cases.

Inventory Sharing and Demand-Side Underweighting

Problem definition: Transshipment/inventory sharing has been used in practice because of its risk-pooling potential. However, human decision makers play a critical role in making inventory decisions in an inventory sharing system, which may affect its benefits. We investigate whether the opportunity to transship inventory influences decision makers’ inventory decisions and whether, as a result, the intended risk-pooling benefits materialize. Academic/practical relevance: Previous research in transshipment, which is focused on finding optimal stocking and sharing decisions, assumes rational decision making without any systematic bias. As one of the first to study inventory sharing from a behavioral perspective, we demonstrate a persistent stocking-decision bias relevant for inventory sharing systems. Methodology: We develop a behavioral model of a multilocation inventory system with transshipments. Using four behavioral studies, we identify, test, estimate, and mitigate a demand-side underweighting bias: although inventory sharing brings both a supply-side benefit and a demand-side benefit, players underestimate the latter. We show analytically that such bias leads to underordering. We also explore whether reframing the inventory sharing decision reduces this bias. Results: Our results show that subjects persistently reduce their order quantities when transshipments are allowed. This underordering, which persists even when a decision-support system suggests optimal quantities, causes insufficient inventory in the system, in turn reducing the risk-pooling benefits of inventory sharing. Underordering is evidently caused by an underweighting bias; although players correctly estimate the supply-side potential from transshipment, they only estimate 20% of the demand-side potential. Managerial implications: Although inventory sharing can profitably reduce inventory, too much underordering undermines its intended risk-pooling benefits. The demand-side benefits of transshipment need to be emphasized when implementing inventory sharing systems

How Do Reward Versus Penalty Framed Incentives Affect Diagnostic Performance in Auditing?

Prior research examines how rewards versus economically equivalent penalties affect effort. However, accountants perform various diagnostic analyses that involve more than exerting effort. For example, auditors often need to identify whether a material misstatement is the underlying cause of a phenomenon among the possible causes. Testing helps identify the cause, but testing is costly. When participants are incentivized to test accurately (rather than test more) and objectively (unbiased between testing and not testing), we find that framing the incentives as rewards versus equivalent penalties increases testing by lowering the subjective testing criterion and by increasing the assessed risk of material misstatement. However, testing increases primarily when a misstatement is absent, causing more false alarms under a reward frame with no improvement in misstatement detection. Penalties are pervasive in auditing. Our study suggests that rewards are more effective for increasing testing, and that increasing testing blindly can impair audit efficiency

Observation Bias: The Impact of Demand Censoring on Newsvendor Level and Adjustment Behavior

In an experimental newsvendor setting we investigate three phenomena: level behavior—the decision-maker's average ordering tendency; adjustment behavior—the tendency to adjust period-to-period order quantities; and observation bias—the tendency to let the degree of demand feedback influence order quantities. We find that the portion of mismatch cost due to adjustment behavior exceeds the portion of mismatch cost due to level behavior in three out of four conditions. Observation bias is studied through censored demand feedback, a situation which arguably represents the majority of newsvendor settings. When demands are uncensored, subjects tend to order below the normative quantity when facing high margin and above the normative quantity when facing low margin, but in neither case beyond mean demand (a.k.a. the pull-to-center effect). Censoring in general leads to lower quantities, magnifying the below-normative level behavior when facing high margin but partially counterbalancing the above-normative level behavior when facing low margin, violating the pull-to-center effect in both cases

Effectiveness of bonus and penalty incentive contracts in supply chain exchanges: Does national culture matter?

In this study, we investigate the impact of national culture on the effectiveness of bonus and penalty incentive contracts in supply chain exchanges. We conducted laboratory experiments in Canada, China, and South Korea, involving transactional exchanges in which suppliers were presented with either bonus or penalty contracts. Then we compared suppliers’ contract acceptance, level of effort, and shirking across national cultures. Our findings reveal critical cultural influences on contract effectiveness. We show that although acceptance of bonus contracts is comparable across cultures, suppliers from Canada, a national culture considered low in power distance and high in humane orientation, exhibit lower acceptance rates of penalty contracts. In addition, we find evidence that suppliers associated with collectivist cultures exert more effort and shirk less in bonus contracts but these relationships also are more complex. When we compare contract effectiveness across bonus and penalty contracts within a given cultural setting, we find in all three countries greater acceptance of bonus contracts than penalty contracts. Also, after contracts are accepted, bonus contracts are more successful in China because suppliers exert greater effort and shirk less under bonus contracts than penalty contracts. However, in Canada and South Korea, the results of accepted contracts for both penalty and bonus contracts are nearly indistinguishable