Thinking orientation and overconfidence: a newsvendor study

Abstract

This paper explores the impact of individual thinking orientation on decision-making behavior in the newsvendor problem. The study investigates the relationships between analytic versus intuitive thinking, individual overconfidence, demand chasing, and newsvendor task outcome. The goal is to develop a comprehensive conceptual model that sheds light on these interconnections. We employ a laboratory study using the newsvendor problem. The study involves a simulation over 50 decision periods in which 142 participants ordered a highly profitable product. The conceptual model and corresponding hypotheses are tested empirically. The results confirm that individuals with higher cognitive reflection achieve better outcome in the newsvendor task. The study reveals connections between thinking orientation, overconfidence, demand chasing, and task outcome. In particular, overprecision is identified as a complementary mediator in the relationship between cognitive reflection and task outcome. This mediation effect is considered a main contribution of the study. This paper contributes to the literature by empirically testing a conceptual model that integrates cognitive reflection, overconfidence, demand chasing, and newsvendor task outcome. The research provides insights into the cognitive mechanisms applied in decision making and offers practical implications for policy development. The findings emphasize the importance of addressing individual thinking orientation in decision support systems to enhance overall performance.

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