Individual differences in the newsvendor problem: Behavior and cognitive reflection

Abstract

Abstract Previous research has shown that when solving a newsvendor problem, individuals systematically and persistently deviate from the profit maximizing quantity. This paper investigates the relationship between cognitive reflection and newsvendor decision making, testing experienced supply chain professionals and subjects affiliated with a university business school in a newsvendor experiment. We find that in high and medium critical ratio environments, individuals with higher cognitive reflection exhibit a lower tendency to chase demand. We also find that cognitive reflection is related to task outcome measures including average expected profit, average order quantity and order quantity variance, and that cognitive reflection is a better predictor of performance than college major, years of experience, and managerial position. These results suggest that cognitive reflection contributes to an understanding of newsvendor decision‐making behavior.