【Speaker】Nils Rudi, Associate Professor, INSEAD

【Topic】Level, Adjustment and Observation Biases in the Newsvendor Model

【Time】15:30-17:30, 2010-04-27, Tuesday

【Venue】Room 453, Weilun Building, Tsinghua SEM

【Language】English

【Organizer】Research Center of Contemporary Management

Department of Management Science and Engineering

Abstract

In an experimental newsvendor setting where 310 subjects make 50 repeated newsvendor decisions with the same known ex-ante parameters, we investigate three biases: Level bias (the average tendency of ordering away from the normative order quantity); adjustment bias (the tendency to adjust period-to-period order quantities) and observation bias (the tendency to let the degree of demand information observed influence order quantities). We study these biases in terms of decisions (quantities) and performance (expected mis-match cost) and find evidence to support the presence of all three as well as significant interaction between them.

We find that the portion of mismatch cost due to adjustment bias exceeds the portion of mis-match cost due to level bias in three out of four conditions, highlighting the importance of considering adjustment bias in addition to the more commonly studied level bias. Observation bias is studied through censored demands, 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 downward adjustment when facing high margin but partially counterbalancing the upwards adjustment when facing low margin, violating the pull-to-center effect in both cases.

Bio of speaker

Nils Rudi's research is in operations management with overlap to information systems, marketing and finance. He has been focusing on supply chain management and how one can use different strategies (e.g., variety postponement, real options, flexibility, financial hedging and incentive structures) to better handle demand uncertainty. Journals where his research has appeared include Interfaces, Journal of Management Information Systems, Management Science, Manufacturing & Service Operations Management, Operations Research and Supply Chain Management Review.

After high school, Nils worked for three years as a computer programmer of ERP (Enterprise Resource Planning) systems at Movex. He then formed Minard, specializing in decision support systems for forecasting and inventory management. Minard did an IPO and went public on the Oslo Stock Exchange (Norway) in 1996. Other work experience range from consulting for firms in a wide variety of industries to negotiating professional football contracts.

Nils studied part time for a B.S. degree in computer science at Molde College (Norway), and holds a Ph.D. in operations management from University of Pennsylvania.