Observation bias
Subtitle: the impact of demand censoring on newsvendor level and adjustment behavior
By: Nils Rudi, David Drake
Contributors: Drake, David F.; Harvard Business School
Series: Working paper / Harvard Business School -- 12-042; Working paper (Harvard Business School) -- 12-042.
Publisher: Harvard Business School
Published: 2011
Place of publication: [Boston]
Language: eng
Number of pages: 24
Description: In an experimental newsvendor setting we investigate three phenomena: Level behavior – the decision-maker's average ordering tendency; adjustment behavior – the tendency to adjust period-to-period order quantities; and observation bias – the tendency to let the degree of demand feedback influence order quantities. We find that the portion of mismatch cost due to adjustment behavior exceeds the portion of mismatch cost due to level behavior in three out of four conditions. Observation bias is studied through censored demand feedback, 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. the pull-to-center effect). Censoring in general leads to lower quantities, magnifying the below-normative level behavior when facing high margin but partially counterbalancing the above-normative level behavior when facing low margin, violating the pull-to-center effect in both cases.
Notes: "December 2011" -- Publisher's website.

Includes bibliographical references.