On the Preference to Avoid Ex Post Inventory Errors

Abstract

The value of demand information underlies many supply chain strategies that aim at better matching supply and demand. This study reports on the results of a laboratory experiment designed to estimate the behavioral value of demand information . Relative to the commonly assumed benchmark of a rational risk‐neutral decision maker, we find that decision makers are consistently willing to pay too much for the option to eliminate the risk of supply not matching demand. Contrary to intuition, we show that risk aversion does not explain this result. We posit that demand information provides behavioral value because it mitigates regret from ex post inventory errors.

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