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

Nils Rudi (nils.rudi@insead.edu) and David Drake (ddrake@hbs.edu)
Additional contact information
Nils Rudi: INSEAD
David Drake: Harvard Business School, Technology and Operations Management Unit

No 12-042, Harvard Business School Working Papers from Harvard Business School

Abstract: 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.

Pages: 25 pages
Date: 2009-05, Revised 2011-12
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (3)

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http://www.hbs.edu/research/pdf/12-042.pdf Revised version, 2011 (application/pdf)

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Persistent link: https://EconPapers.repec.org/RePEc:hbs:wpaper:12-042

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