Behavioral implications of demand perception in inventory management

Dilek Onkal, Ayse Kocabiyikoglu, Mustafa Sinan Gonul, Itir Gogus

Research output: Chapter in Book/Report/Conference proceedingChapterpeer-review

Abstract

The newsvendor problem is one of the rudimentary problems of inventory management with significant practical consequences, thus receiving considerable attention in the behavioral operational research literature. In this chapter, we focus on how decision makers perceive demand uncertainty in the newsvendor setting and discuss how such perception patterns influence commonly observed phenomena in order decisions, such as the pull-to-center effect. Drawing from behavioral biases such as over precision, we propose that decision makers tend to perceive demand to be smaller than it actually is in high margin contexts, and this effect becomes more pronounced with increases in demand size. The opposite pattern is observed in low margin settings; decision makers perceive demand to be larger than the true demand, and this tendency is stronger at lower mean demand levels. Concurrently, decision makers tend to perceive demand to be less variable than it actually is, and this tendency propagates as the variability of demand increases in low margin contexts and decreases in high margin contexts. These perceptions, in turn, lead to more skewed decisions at both ends of the demand spectrum. We discuss how decision makers can be made aware of these biases and how decision processes can be re-designed to convert these unconscious competencies into capabilities to improve decision making.
Original languageEnglish
Title of host publicationBehavioral Operational Research
Subtitle of host publicationA Capabilities Approach
EditorsLeroy White, Martin Kunc, Katharina Burger, Jonathan Malpass
Place of PublicationCham
PublisherPalgrave
Chapter2
Pages23-40
ISBN (Electronic)9783030254056
ISBN (Print)9783030254049
DOIs
Publication statusPublished - 2020

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