The Use of Framing in Inventory Decisions

Research has demonstrated that people often use decision criteria other than expected profit. This paper uses "framing" to investigate whether this phenomenon occurs in inventory decisions. Risk reflection is a human decision bias where questions that are framed to emphasize gain often induce risk averse behavior while those emphasizing loss often induce risk seeking behavior. The Newsvendor inventory decision provides a simple case to test whether this occurs in Operations Management situations. We frame the decision emphasizing first profit and then cost. Surprisingly, the expected results do not occur. To investigate why, we start with the initial work on framing and increase the complexity of the situation to gain insight into behavioral reactions. In the process we discuss both the relevance of the findings and some of the difficulties inherent in behavioral research in Operations Management.