Abstracts
2009 Behavioral Operations Conference
Dynamics
Learning and Stability
Supply Chains
Managerial Issues
Newsvendor Experiments
Dynamic Pricing with Strategic Consumers under Inventory Constraints
Eyran Gisches, University of Arizona
Abstract: We consider a strategic retailer who wishes to sell an inventory of perishable goods to multiple strategic consumers with time preference over a two-period season. Each customer’s valuation of the good is private knowledge; the retailers only know its prior distribution. We find that in equilibrium when the (exogenously determined) inventory level is sufficiently low, the monopolist sells all of its goods in the first period. However, when the inventory level is sufficiently high, in equilibrium sales take place in both periods and in some cases goods are left unsold. Counter-intuitively, even without procurement and holding costs, it is more profitable for the retailer to stock a medium rather than a high level of inventory. We present and discuss experimental evidence for a market with one retailer and twenty customers under two different inventory levels. Return to top
Effects of Dynamic Duopoly Competition on Myopic and Strategic Consumers
Abstract: Amnon Rapoport, UC Riverside
We consider a new type of discrete-time finite-period dynamic copmpetition between two retailers why wish to sell an identical unit of good to a single consumer. The consumer alternates between the two retailers, visiting one of them at a time. The valuation of the good is private knowledge to the consumer; the retailers only know its prior distribution. We characterize the equilibrium solution for the cases of myopic and strategic consumers. In the latter case, we consider the competition when i) the posted price of retailer i is observed by retailer j (i, j=1, 2) once it is rejected by the consumer, and 2)when it is not. Finally, we report the results of an experiment that factiorally manipulated the consumer type (myopic vs. startegic) and duration of the selling season. Return to top
Revenue and Cost Management for Remanufactured Products
Anton Ovchinnikov, University of Virginia, Darden School of Business
Abstract: This paper presents a model and a study of consumer behavior with respect to the choice between new and remanufactured products. Our model does not rely on knowing consumers’ willingness-to-pay, but rather it relies on knowing the fraction of consumers who switch from the new to the remanufactured product. In the behavioral study we find that the switching fraction has an inverted U-shape, and thus the underlying consumer behavior cannot be modeled using the willingness-to-pay approach. Combining theoretical and behavioral results, we find that the firm in most cases follows one of three strategies – remanufacture nothing, remanufacture everything, or resell falsely returned products. We characterize the optimality conditions for each strategy, relate them to the underlying product and market parameters (consumer behavior, price, demand elasticity, and others) and discuss managerial intuition. In particular we comment on the differences between our results and WTP-based solutions. Return to top
Managers and Students as Newsvendors: How Out-of-Task Experience Matters
Ulrich Thonemann, University of Cologne
Abstract: We compare how freshmen business students, graduate business students and experienced procurement managers perform on a simple inventory ordering task. We find that, qualitatively, managers exhibit ordering behavior similar to students, including biased ordering towards average demand. Experience, however, affects subjects’ utilization of information. The managers’ work experience seems most valuable when there is only historical demand data to guide decision making, while students better utilize analytical information and task training. As a result, when information necessary to solve the problem to optimality is added to historical information, students catch up to the managers, and students with classroom experience in operations management outperform managers. Return to top
Physicians or Engineers as Supply Chain Managers: Which is the Best Choice for Hospitals?
Cándido Pérez, IESA
This paper empirically analyzes the usual practice of relaying on physicians as hospital supply chain managers (SCM) comparing their performance against other SCM managers through a well-known individual-group task (Beer Game). This sample includes 104 physicians engaged in hospitals’ director roles and 368 business executives from other economic sectors. I found evidence against the hypothesis of rely on specialized professional managers—mainly industrial engineers--to manage supply chains. In addition, time-series studies show memory recency effect among participants. Return to top
Temporal Correlation of Lottery Choices and fMRI Imaging
Kay-Yut Chen, HP Labs
Standard rational decision theories consider the evaluation of utilities is independent across time for separate decision problems. That is, if an individual makes a series of decisions, each a choice between two independent lotteries, he or she will evaluate these lotteries independently. Most behavioral models would also follow the same approach and treat separate decisions, even those made in close temporal proximity, independently. A series of experiments were conducted at Stanford University where subjects were asked to make a sequence of 60 choices between the same two lotteries while their brains were scanned with fMRI (functional magnetic resonance imaging) techniques. Subject choices are not identical across time. Therefore, the standard expected utility maximization framework cannot be used to explain observed behavior . A bounded rational model, such as the quantal response model, which incorporates random mistakes, would be more appropriate. However, the quantal response model assumes random variations in decisions are independent across time. We also observe a non-trivial correlation of choices over time, which cannot be explained. fMRI imaging data reveal a non-trivial temporal pattern of activations of two specific locations. These patterns, aside from correlated with the actual decisions, suggest that utility evaluation may follow two principles. First, utilities are evaluated with random errors, which are captured in the quantal response framework. Secondly, these random errors are correlated over time. Intuitively, a person can evaluate today’s choices remembering his evaluation yesterday and also what happened yesterday, and that can affect his judgment. We have developed a modified version of the quantal response model, with a specific correlation structure between successive utility evaluations (based on fMRI data analysis) that can explain the data. Return to top
Extended screening contracts and coordination in a single-supplier multi-buyer supply chain
Guido Voigt, Otto-von-Guericke University
Abstract: Theory predicts that supply chain managers will use their private information strategically if they do not get any specific incentive for truthful information sharing. The best answer of the ill-informed supply chain party is to offer a screening contract which leads to a lack of supply chain coordination. However, previous experimental research indicates that communication influences the decision behavior. Hence, this contribution investigates whether communication can be utilized by the supply chain parties as a coordination device. We study two supply chain configurations. The first configuration consists of one supplier who interacts with one buyer. The second setting depicts a diverging supply chain in which one supplier is interacting with two buyers. The supplier does not possess full information of the cost position of the buyer(s). We allow the supplier in both settings to either offer a screening contract or a contract that coordinates the supply chain. Furthermore, the supplier can share the benefits of truth-telling and trust with an additional side-payment. We find that there is significantly less communication in diverging supply chains although communication is more informative in this setting. Yet, the supplier in diverging supply chains do not exhibit more trust than the supplier in the serial one. Thus, the supplier does not exploit the coordination potential inherent in truthful information sharing. Additionally, the side-payments are far too low to make communication efficient. Nonetheless, the additional side-payments are significantly positive correlated with the frequency of contract acceptances. Finally, we find that screening contracts are not behavioral robust, i.e. slight deviations from the assumed behavior can heavily distort the coordination power of such contracts. Offering screening contracts, however, has on average a positive effect on supply chain performance. This implies that incentive compatible screening contracts in combination with additional benefit sharing mechanisms (i.e. additional side-payments) are able to coordinate the supply chain at least to some extent. Return to top
Coordination in Supply Chains when Demand Forecasts are not Common Knowledge: Theory and Experiment
Kyle Hyndman, Southern Methodist University
Abstract: We study, both theoretically and experimentally, the issue of coordination in a supply chain in which an upstream firm (manufacturing) and a downstream firm (sales) must simultaneously make an irreversible capacity choice before demand is realized. We are particularly focused on the issue of how common knowledge (or lack thereof) of demand forecasts affects the ability of firms to coordinate their actions as well as the efficiency of their chosen actions. When demand forecasts (i.e., beliefs) are not commonly held, firms will be misaligned with probability one and will choose strictly lower capacities than when demand forecasts are commonly held. Thus the problem of coordination becomes more daunting. We also show that firms have an incentive to share their private information (in order to both restore common knowledge and also improve forecast accuracy). Our experiment formally tests the model's theoretical predictions, and also examines whether subjects can learn to coordinate their actions over time. The results are consistent with the theory. First, most of our subjects use monotone strategies, and those that do not, earn significantly less. Second, when forecasts are not common knowledge subjects' choices are less well coordinated. Third, information sharing leads to more accurate and more well coordinated choices, thereby leading to higher earnings. Finally, we show learning occurs: subjects are better able to coordinate over time and subjects' earnings increase over time. Return to top
The Impact of Disruptions on Supply Chain Strategy and Performance
John Macdonald, Michigan State University
Abstract: Disruptions in the supply chain can have major financial and strategic consequences. Some firms choose to make changes to their supply chain strategies after a disruption while other firms choose to maintain the same strategy. What causes these strategy choice differences? This research uses the theory of strategic persistence to provide an overarching framework for answering this question. Using an experimental methodology, participating subjects playing a supply chain game will be exposed to disruptions of various types and impact. Some disruptions will cause an “environmental” change rendering the strategy that allowed the subject to succeed prior to the disruption as the incorrect strategy after the disruption has occurred. The performance of the subject prior to the disruption will likely have an impact on their recognition of the environmental change and result in poorer performance while those who were not succeeding before will still be trying new ways to succeed and should recognize the environmental change. This will provide significant managerial insights for determining strategic directions and the need to reassess the situation after a disruption has occurred. Return to top
Taming or Flaming Firefighting? Complexity, Screening and Allocation Bias in R&D Pipeline
Nitin Joglekar, Boston University School of Management
Abstract: Most projects in an innovation portfolio are developed through a sequence of stages in a R&D pipeline. It has been argued that managers exhibit a bias towards allocating resources to late stage tasks or projects. This bias often results in a myopic cycle of imbalance termed as firefighting, such that current firefighting begets future firefighting, decreasing portfolio performance. We explore tradeoffs associated with key R&D portfolio management decisions in the presence of an allocation bias: either adding to the number of starts or selecting more complex projects and screening out a fraction of projects midway through the pipeline. We derive analytical conditions on the stability of the portfolio performance and use these conditions to compare alternative incentive schemes. We conclude by illustrating how these conditions can be tested experimentally. Return to top
Managerial Biases and Energy Savings
Suresh Muthulingam, UCLA Anderson School of Management
Abstract: We investigate the adoption and non-adoption of energy efficiency initiatives using a database of over 100,000 recommendations provided to more than 13,000 small and medium sized manufacturing firms. Even though the average payback across all recommendations is just over one year, many of these profitable opportunities are not implemented. Using a probit instrumental variable model, we identify four biases in the adoption of these recommendations. First, managers are myopic as they miss out on many profitable opportunities. Second, managers are more influenced by upfront costs than by net benefits when evaluating such initiatives. Third, adoption of a recommendation depends not only on its characteristics but also on the sequence in which the recommendations are presented. Adoption rates are higher for initiatives appearing early in a list of recommendations. Finally, adoption is not influenced by the number of options provided to decision makers. This contributes to the debate about whether or not choice overload occurs. We highlight previously unobserved decision biases in the Operations Management literature using field data rather than using experimental data. We draw implications for enhancing adoption of energy efficiency initiatives and for other decision contexts where a collection of process improvement recommendations are made to firms. Return to top
Managing Projects with Present-Biased Agents
Yaozhong Wu, NUS Business School, National University of Singapore
Abstract: Projects are gaining greater prominence in organizations as important vehicles for achieving growth and value creation. Workers in projects have a large degree of autonomy and cannot be easily monitored. In such situations, the behaviors of individuals, such as their tendency to leave more work for later completion, become critical in determining overall project performance. This paper analytically examines the effects of a common decision bias in inter-temporal decision making, the present bias, which causes agents to associate a greater salience to immediate effort, and correspondingly, a lower cost for the same effort taken in the future. We model the problem faced by the manager of a project whose quality is adversely impacted by distortion of effort over time. In a principal-agent setting, we study how a project should be managed to minimize such quality loss by structuring incentives in the form of wage payments over time to elicit smoothed effort from present-biased agents. Our analysis yields valuable results regarding how agents with different levels of present-bias influence the effort allocation of one another. We develop several managerial insights about the constitution of the project team and the management of information asymmetry among such agents. Return to top
Overconfidence in the Newsvendor Problem: An Experiment Study
Yufei Ren, University of Texas at Dallas
Abstract: Previous behavioral studies have shown that individuals make suboptimal decisions in supply chain and inventory planning problems (e.g. Schweitzer and Cachon 2000, Bolton and Katok 2008). A number of behavioral factors have been suggested which might cause this behavior, including anchoring and insufficient adjustment (Schweitzer and Cachon 2000), bounded rationality (Su 2008) and overconfidence (Croson, Croson and Ren 2008). In this experimental study, we disentangle these underlying causes by measuring an individual’s level of overconfidence, anchoring and beliefs and comparing these measures with their decisions in a simplified newsvendor setting. We also test the effectiveness of a debasing technique; altering salvage cost and marginal costs, on improving behavior. References Bolton, G. E. and E. Katok. 2008. Learning-by-Doing in the Newsvendor Problem. A Laboratory Investigation of the Role of Experience and Feedback. Manufacturing & Service Operations 10(3) 519-538. Schweitzer, M. E., G. P. Cachon. 2000. Decision Bias in the Newsvendor Problem with a Known Demand Distribution: Experimental Evidence. Management Science 46(3) 404-420. Su, X. 2008. Bounded Rationality in Newsvendor Models. Manufacturing & Service Operations Management. 10(4) 566-589. Return to top
Level, Adjustment and Observation Biases in the Newsvendor Model
Nils Rudi, INSEAD
Abstract: In an experimental newsvendor setting where 310 subjects make 50 repeated newsvendor decisions, we investigate three forms of biases: Level bias - the average tendency of ordering away from the optimal order quantity; adjustment bias - the tendency to adjust order quantities; and observation bias - the tendency to let the degree of information available influence order quantities. We study these biases in terms of decisions (quantities) and performance (expected mismatch cost) and find evidence of all three of them as well as significant interaction between them. We find that the portion of mismatch cost due to adjustment bias exceeds the portion of mismatch cost due to level bias in three out of four conditions, highlighting the importance of considering adjustment bias in addition to the more commonly studied level bias. Observation bias is studied through censored demands, 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. pull-to-center effect). Censoring in general leads to lower quantities, magnifying the downward adjustment when facing high margin but partially counterbalancing the upwards adjustment when facing low margin, and in both cases actually violating the pull-to-center effect. Return to top
Newsvendor Order Distribution under Contracts with Threshold
Diana Wu, University of Kansas
Abstract: We use a series of experiments to study the behavior of a newsvendor retailer under supply chain contracts that involve threshold, for example, quantity discounts and sales target rebate. Previous studies show that decision makers tend to anchor orders on the mean customer demand, which can lead to suboptimal performance of the channel. All earlier newsvendor experiments focus on the analysis of the average of ordering decisions. In this study, we look at the overall order distributions under different contracts and find that by constructing the threshold effectively, the anchoring behaviors can be largely reduced. We propose a behavioral model based on quantal response to describe the observed behavioral changes in order distributions. Return to top
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