The Use of Framing in Inventory Decisions
Kenneth L. Schultz, Lawrence W. Robinson, L. Joseph Thomas, Johnathon Schultz, John O. McClain
Production and Operations Management · 2018 · Volume 27 · Issue 1
Abstract
It is well established that human newsvendors tend to order insufficient inventory in high-margin situations, possibly due to implicit risk aversion. In this study, we investigate the use of framing to change newsvendors’ risk preference in order to induce them to make better ordering decisions. Through an exploratory experiment and five different treatments of the newsvendor problem, we found risk reversal only in the treatments with one question. In the other four treatments and the exploratory experiment, we asked multiple questions and found no evidence of risk reversal. Thus, we conclude that risk reversal cannot reliably be used without pretesting and that behavioral theories need to be tested in context. Finally, we reaffirm research showing that relying on averages can mask the heterogeneity of human decision-making.
Keywords
framing, prospect theory, newsvendor, behavioral operations management
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