An Analysis of Empirical Newsvendor Decisions: Target Service Levels are Achieved Effectively, but Inefficiently

Human decision making in the newsvendor context has been analyzed intensively in laboratory experiments, where various decision biases have been identified. However, it is unclear whether these biases also exist in practice. We analyze the ordering decisions of a manufacturer who faces a multi-product newsvendor problem with an aggregate service level constraint. The manufacturer broadly exhibits the same biases as subjects do in the laboratory and is prone to another bias that has not been identified before, that is, group aggregation. The bias can be attributed to the multi-product problem of the manufacturer, and refers to the observation that the service levels are not optimized for individual products, but rather for product groups. Our data allows us to analyze the manufacturer’s performance in detail and we find that he achieves target service levels effectively, but not efficiently. We provide rationales for the manufacturer’s ordering behavior, discuss managerial implications, and quantify the financial benefits of de-biasing ordering decisions.