Research On Inventory Decision-making With The Overconfident Retailer

Traditional supply chain inventory decision-making is based on the neo-classicaleconomics "rational economic man" hypothesis, but supply chain there have been somenew changes with the rapid advance of industrial chain, empirical studies have showedthat humans’ decision-making systematically deviates from the actual decision-makingwhich based on "rational economic man" hypothesis with the uncertain environment. Inorder to solve this problem, only through studying the decision-makers’cognitive behaviorand psychology can we better guide the practice. Empirical studies also have found thatinventory managers often have an irrational tendency to place an order, overconfidence asa typical irrational behavior gradually attracts much attention in all walks of life recently,and many managers even can’t recognize their own overconfidence, overconfidenceaffects decision-makers’ information cognition and gives decision-makers and othermembers of the supply chain positive or negative impact. This article combines theoverconfidence and traditional supply chain inventory decision theory to focus oninventory decision problem with the overconfident retailer.In this article, I establish an overconfident newsvendor model via considering thenewsvendor’overconfidence on the basis of classical newsvendor model firstly, derive theanalytic relationship between the optimal order quantity of the overconfident newsvendorand that of the benchmark newsvendor and demonstrate how order bias changes with thelevel of overconfidence, then I proved that belief expected profit always larger than theoptimal expected profit of the benchmark newsvendor, which explains theoretically thatwhy overconfident newsvendor makes his order decision according to his belief about thetrue demand. Secondly, I extend the overconfident newsvendor model to the productioncompetition model and analyze how the overconfidence level affects the retailers’ optimalorder quantity and the expected profits. I find that the overconfident retailer prefers toorder more and gain much more profit than the rational retailer, no matter the rationalretailer is the leader or the overconfident retailer is the leader in the Stackelberg game.Therefore, overconfidence not always leads to negative effect. At the same time, weconfirm that overconfidence doesn’t affect first-mover advantage in the StackelbergGame.