The overconfident newsvendor Ren, Yufei; C. Croson, David; T.A. Croson, Rachel
The Journal of the Operational Research Society,
05/2017, Letnik:
68, Številka:
5
Journal Article
Recenzirano
Previous experimental work has shown that individuals make suboptimal decisions in newsvendor problems. We argue that these decisions may be caused by overconfidence, and explore a theoretical ...(behavioral) model of overconfident newsvendors first presented in Ren and Croson (
2013
) that is consistent with these observed results. Using classical analysis techniques, we show that overconfident newsvendors will over-order in low-profit situations and under-order in high-profit situations, exhibiting the ordering pattern observed in the field and in the lab. In this paper, we further demonstrate that order bias is linear in the level of overconfidence, and is increasing with the variance of the demand distribution. Order bias also has a U-shaped relationship with market profitability, and the costs of overconfidence are convex. We use the theory to develop new predictions which can be themselves tested in future work.
Information technology matters to business success because it directly affects the mechanisms through which they create and capture value to earn a profit: IT is thus integral to a firm's ...business-level strategy. Much of the extant research on the IT/strategy relationship, however, inaccurately frames IT as only a functional level strategy. This widespread under-appreciation of the business-level role of IT indicates a need for substantial retheorizing of its role in strategy and its complex and interdependent relationship with the mechanisms through which firms generate profit. Using a comprehensive framework of potential profit mechanisms, we argue that while IT activities remain integral to the functional-level strategies of the firm, they also play several significant roles in business strategy, with substantial performance implications. IT affects industry structure and the set of business-level strategic alternatives and value-creation opportunities that a firm may pursue. Along with complementary organizational changes, IT both enhances the firm's current (ordinary) capabilities and enables new (dynamic) capabilities, including the flexibility to focus on rapidly changing opportunities or to abandon losing initiatives while salvaging substantial asset value. Such digitally attributable capabilities also determine how much of this value, once created, can be captured by the firm—and how much will be dissipated through competition or through the power of value chain partners, the governance of which itself depends on IT We explore these business-level strategic roles of IT and discuss several provocative implications and future research directions in the converging information systems and strategy domains.
Empirical evidence suggests that entrepreneurs make mistakes: too many enter markets and, once there, persist too long. Although scholars have largely settled on behavioral bias as the cause, we ...suggest that this consensus is premature. These mistakes may also arise from a process in which entrepreneurs continually learn about their prospects and make entry and exit decisions based on what they have learned. We develop a computational model of this process that connects pre- and post-entry learning and can be directed to analyze Bayesian-rational or biased entrepreneurs. The model suggests that, to outside observers, rational entrepreneurs may appear overconfident, seem to take too long to exit, and exhibit a positive correlation between entry cost and persistence in the market. When examining confidence biases, the model suggests that entrepreneurs whose biases cause them to perform the worst after entry will be most likely to enter, that pre-entry learning induces a positive correlation between distinct confidence biases among entrants, and that exit changes the prevalence of certain biases in the surviving population of entrants over time. Our study also speaks to recent work on pre-entry experience that documents the transfer of knowledge from parent to progeny firms, suggesting that, in addition to inheritance, differential performance may also be the result of heterogeneity in the length and quality of pre-entry learning during which an opportunity is assessed.
► Earnings from self-employment are, on average, lower than those from employment. ► Some individuals may have an autonomy-based preference for self-employment. ► We model tradeoffs between autonomy ...from self-employment and higher wage-earnings. ► We show that optimal launch-timing decisions guarantee that income is reduced. ► We offer an alternative to claims that self-employment stems from overconfidence.
This paper models the tradeoff between increased autonomy from self-employment and the generally higher income that traditional employment offers. While the demand for autonomy is a purely psychological construct, the economic tradeoffs involved in its achievement are eminently amenable to quantification and analytical modeling characteristic of economic analysis. We use this setup to offer a multifactor utility formulation formalizing the notion of an explicit, autonomy-based preference for self-employment. We propose such a formulation as a theoretically-defensible alternative to the classic (and also psychologically-based) overconfidence hypothesis in explaining why self-employment is chosen despite evidence that newly self-employed individuals earn less than comparable individuals who continue their current employment. Our model, founded on utility maximization by a rational individual, demonstrates not only that newly self-employed individuals are willing to accept lower earnings outcomes in exchange for psychic benefits from self-employment, but also that the structure of their optimal launch-timing decision
guarantees that they will quit at a time such that their income will (at least initially) be reduced. We conclude with implications for the design of empirical instruments to quantify the relative importance of autonomy and income.
We use agent-based modeling to study the performance of a supplier selection model, originally proposed by Croson and Jacobides Small Numbers Outsourcing: Efficient Procurement Mechanisms in a ...Repeated Agency Model, Working Paper #99-05-04 Department of Operations and Information Management, The Wharton School of the University of Pennsylvania (1999), which displays a complicated reward and punishment profile under incomplete information. We document the dynamics and convergence to equilibrium of the interactions of a single buyer with a heterogeneous group of sellers, which results in both
separation of sellers capable of producing high-quality goods from those incapable of doing so, and
continuing incentives for high-quality-capable sellers to produce at the maximum quality possible. We model two methods of determining exploration reference points—an “auction-style” model focusing on probability of success and a “newsvendor-style” model focusing on profitability. Our simulation shows that (1) the tournament structure suffices to reach convergence at high-quality levels whenever the number of suppliers exceeds three, (2) punishment length and number of suppliers are substitutes, and (3) shorter punishments improve learning speed of convergence. Moreover, we show that it is strictly better for the buyer to transact with relatively few suppliers—a conclusion generated endogenously inside the model as a tradeoff between exploration and exploitation, rather than through assumptions that explicitly penalize supplier proliferation.
The expected value of information in a standard portfolio investment problem with ex-post payment can increase when the information is garbled prior to its sale. Distorting the information helps to ...resolve the incentive problem decreasing the buyer's default risk and thereby increasing the seller's expected revenues.
We use agent-based modeling to study the performance of a supplier selection model, originally proposed by Croson and Jacobides Small Numbers Outsourcing: Efficient Procurement Mechanisms in a ...Repeated Agency Model, Working Paper #99-05-04 Department of Operations and Information Management, The Wharton School of the University of Pennsylvania (1999), which displays a complicated reward and punishment profile under incomplete information. We document the dynamics and convergence to equilibrium of the interactions of a single buyer with a heterogeneous group of sellers, which results in both separation of sellers capable of producing high-quality goods from those incapable of doing so, and continuing incentives for high-quality-capable sellers to produce at the maximum quality possible. We model two methods of determining exploration reference points - an "auction-style" model focusing on probability of success and a "newsvendor-style" model focusing on profitability. Our simulation shows that (1) the tournament structure suffices to reach convergence at high-quality levels whenever the number of suppliers exceeds three, (2) punishment length and number of suppliers are substitutes, and (3) shorter punishments improve learning speed of convergence. Moreover, we show that it is strictly better for the buyer to transact with relatively few suppliers - a conclusion generated endogenously inside the model as a tradeoff between exploration and exploitation, rather than through assumptions that explicitly penalize supplier proliferation. PUBLICATION ABSTRACT
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