Do Random Errors Explain Newsvendor Behavior?

Previous experimental work showed that newsvendors tend to order closer to mean demand than prescribed by the normative critical fractile solution. A recently proposed explanation for this mean ordering behavior assumes that the decision maker commits random choice errors, and predicts the mean orde...

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Bibliographic Details
Published inManufacturing & service operations management Vol. 12; no. 4; pp. 673 - 681
Main Authors Minner, Stefan, Kremer, Mirko, Wassenhove, Luk N. Van
Format Journal Article
LanguageEnglish
Published INFORMS 01.10.2010
SeriesManufacturing & Service Operations Management
Subjects
heuristics
newsvendor model
random choice
task context
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Summary:Previous experimental work showed that newsvendors tend to order closer to mean demand than prescribed by the normative critical fractile solution. A recently proposed explanation for this mean ordering behavior assumes that the decision maker commits random choice errors, and predicts the mean ordering pattern because there is more room to err toward mean demand than away from it. Do newsvendors exhibit mean ordering simply because they make random errors? We subject this hypothesis to an empirical test that rests on the fact that the random error explanation is insensitive to context. Our results strongly support the existence of context-sensitive decision strategies that rely directly on (biased) order-to-demand mappings, such as mean demand anchoring, demand chasing, and inventory error minimization.
ISSN:1523-4614
1526-5498
DOI:10.1287/msom.1100.0294