Thursday 20 November

Beyond Pull-to-Center: How System Neglect Shapes Ordering Decisions Under Shifting Demand

Canan Ulu – McDonough School of Business, Georgetown University, Washington, DC

[joint work with Yucheng Su and Matthias Seifert from IE Business School, IE University, Madrid, Spain, and Sreyaa Guha from Nova School of Business and Economics, Universidade NOVA de Lisboa, Lisbon, Portugal]

Abstract:

We examine how decision makers adjust ordering decisions in response to demand signals that are indicative of a demand shift in newsvendor settings. Demand shifts driven by market changes, seasonality, or external shocks create uncertainty that decision makers frequently encounter in practice. Integrating models that explain the well-known pull-to-center (PTC) effect in static newsvendor environments and models of system neglect that explain how probability judgments react to signals indicative of a demand shift, we predict when PTC and system neglect effects offset versus amplify one another. Specifically, for high-margin products in stable environments with noisy signals and low-margin products in unstable environments with precise signals, system neglect and PTC effect tend to counteract each other, resulting in ordering decisions closer to optimal levels. In the remaining profit margin and demand environments, system neglect amplifies the underordering and overordering behavior resulting from the PTC effect. We study these predictions in experimental settings with uncensored and censored demand signals and find support for our model predictions. We discuss implications for providing managerial decision support in environments with salient demand shifts.

Registration, please contact robin@em-lyon.com

Room B3-103, Lyon campus