An Experimental Investigation of Distracted Newsvendor Decisions

Abstract

Newsvendor decision making is ubiquitous in the global economy. Very often, newsvendor decision makers are overworked; thus, making ordering decisions is one of myriad things on their plate. They do not have the energy to focus solely on the newsvendor decisions and yet have to make them under significant information and cognitive constraints. Existing experimental research on human newsvendors has completely ignored this aspect of decision making and has focused entirely on settings in which the newsvendor decision is the only thing the subject is working on. We investigate the impact of presence of other tasks on the effectiveness of the distracted newsvendor’s ordering decisions. We conduct experiments manipulating the level of cognitive load that the subjects face during newsvendor decision making and find that, on average, subjects under cognitive load (i.e., distracted subjects) tend to order less than those under no cognitive load (i.e., non-distracted subjects) in both the high and low margin conditions, but the difference is not significant in the low margin condition. Additional experiments show that in the high margin condition, the effect of cognitive load on newsvendor ordering decisions is partially mediated by financial risk preference, but not social risk preference. Distracted subjects tend to be more risk averse, resulting in lower order quantities. Based on these results, we provide guidelines to managers on how they should determine the workloads of employees tasked with newsvendor decisions.