Mitigating Unwarranted Forecasting Behavior in the Newsvendor Task

Abstract

We use a combination of eye tracking and retrospective verbal protocol analysis (VPA) to map the decision making process in the newsvendor task. In Study 1, we found that decision makers in the classic repeated newsvendor task setting show a propensity to forecast demand using perceived trends in the past demand when actually forecasting is normatively inappropriate in this context. We explored two interventions to rectify this pattern of behavior. First, by suppressing the temporal dimension (Supp_Temp_Dim), that is, asking the participants to make newsvendor decisions for 20 different products for the same period instead of making the newsvendor decision 20 times for the same product, we observed a decrease in the extent of forecasting behavior. Second, by imposing standing orders (Stdg_Ord), we observed that it increased the forecasting horizon. In Study 2, we tested an intervention that sensitized the subjects to the critical fractile logic (Crit_Frac) and found that it improved financial performance. The forecasting behavior persisted but the orders now fluctuated around a higher mean than before. The improved understanding of the fundamental cognitive processes that lurk behind the observed decisions can translate into improved real world decision making.

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