The Behavioral Traps in Making Multiple, Simultaneous, Newsvendor Decisions

Abstract

This paper explores the link between bounded rationality, and complexity of decision problems in a newsvendor setting. We compare behaviors of newsvendors who manage one versus two stores, and find that individuals making two simultaneous newsvendor decisions, in both same-margin and mixed-margin scenarios, exhibit worse performances than making a single newsvendor decision, driven by lower levels of learning, and stronger demand chasing behavior. Furthermore, while in our setting, the two newsvendor decisions are independent to each other, order decisions are impacted by both exogenous demand signals and endogenous order decisions of the other store. We call it the “cross store influence.” We develop a behavioral model, based on linear adjustment dynamics, to explain the findings, and provide an theoretical analysis of the long term behavior of this model. These results highlight the importance of assigning the right amount of decision responsibilities to managers, and keeping them not distracted from unrelated information.