Behavioral perspective of newsvendor ordering decisions: review, analysis and insights

The traditional newsvendor model has focused on deriving the optimal order quantity that minimises the balance between stocking too much or too less number of products. However, the managers make inventory decisions based on intuitions and shortcuts, which may involve human errors and biases. The effect of cognitive biases and heuristics influencing the inventory ordering decisions in newsvendor settings is highlighted. The advancement of research associated to the newsvendor biases is reviewed to appreciate the behavioral aspects of the minds underlying this process.

The use of experimental and non-experimental methods to investigate the ordering behaviour of newsvendors is described and we present a framework of the existing literature and highlight the research gaps to point to future research possibilities and priorities.

The proposed framework gives a systematic approach to confirm the existence of a substantial scope of research opportunities and points to specific areas for further research. It synthesizes the existing results of behavioral newsvendor research and will act as a key reference paper. In addition, it will help the practitioners and software tool vendors to comprehend the behavioral perspective of newsvendor preferences and design strategies to mitigate this effect. The insights will be helpful for academicians, researchers and practitioners working in the areas of experimental economics, behavioral economics, behavioral operations, bounded rationality theory, newsvendor modelling and supply chain contracts.

A summary of literature in this evolving area of research is very scarce. Considering the impact of behavioral economics on managerial decisions in the contemporary world, it is highly important to have an educational summary which can act as a tool for the practitioners and researchers in the area of behavioral operations management.