The Effects Of Overconfidence And Demand Uncertainty In Supply Chain Systems

Overconfidence preference theory which has been very widely used in behavioral economics is one of the important psychology researches. With this theory economists have explained much strange phenomenon of financial markets and corporate governance. However, the study of the supply chain integrating overconfidence is rare. Randomized comparison which uses the probabilistic methods is an effective way to study the impact of uncertainty on system policy and its performance. Supply chain management issues such as supply chain coordination under different risk preferences, inventory management, optimal order quantity and optimal profits, etc. have been fully resolved, but the impact of demand uncertainty on these strategies still needs to be further explored. The review in this paper introduced the major methods and models and the development of the theory of supply chain behavior, overconfidence theory and stochastic comparison research. The core of this paper is to study the supply chain integrating overconfidence and the impact of demand uncertainty on strategies and system performance indicators.First, based on newsboy model, In order to depict the decision-maker’s overconfidence, we respectively introduce a mean-preserving and variance-decreasing and a mean-increasing and variance-decreasing transformation. We explored the difference between the overconfident newsboy and rational one, calculated lost profits of overconfidence newsboy. Furthermore, using randomized comparative and standardization transform methods studied the impacts of demand uncertainty on order quantity and profits. Second, as to the newsvendor facing sales effort dependent demand, we give the optimal effort level and order quantity on the assumption of ocerconfident level, then analyze the influence that overconfident level exerts on the optimal decisions. With the stochastic comparison method, we analyze how the demand uncertainty affects the system. Finally, for the overconfident supply chain composed of a rational supplier and an overconfident retailer, we find that the wholesale price contract and buy back contract can coordinate the overconfident supply chain with a random demand. Finally, under the coordination of the supply chain, we study the impacts of demand uncertainty on the overconfident retailer’s ordering policy by using the comparative method and the impacts of demand uncertainty on the overconfident retailer’s profit by using standardized methods.