Reactions to Demand Magnitude and Variability in Order Decisions: Behavioural Implications

In recent years, considerable research attention has been drawn to the behavioural newsvendor problem, which constitutes one of the fundamental problems of inventory management with significant practical consequences. One of the persistent findings in this literature is the pull-to-centre effect, which can be summarized as the tendency of the decision makers to set their order decisions between the mean demand and the normative order quantity. In the current study, we attempt to explore how decision makers will react to demand uncertainty, particularly to changes in demand magnitude and demand variability and investigate the corresponding pull-to-centre effect. We also try to identify the possible cognitive biases, such as overconfidence, that may prevail in this decision process. Findings are discussed and guidance for future research will be given.