Asymmetric Ordering Behavior in Newsvendor Inventory Decisions : Customer Service and Cognitive Dissonance

When solving a newsvendor problem, individuals systematically and persistently deviate from the profit maximizing order quantity. Previous research has shown that individuals tend to order too much in a low margin setting and too little in a high margin setting. This “pull to center” effect is asymmetric relative to the mean of the demand distribution and is typically about twice as strong in low margin contexts relative to high margin contexts. This research posits that cognitive dissonance surrounding customer service expectations is a cause of this behavioral anomaly as individuals act to mitigate dissonance. Order quantities below the mean correspond with planning a priori to disappoint customers, and this appears to cause cognitive dissonance even though doing so maximizes expected profit in a low-margin setting. We test this proposition in a behavioral experiment with 176 participants, showing that the amount of dissonance mitigation differs based on margin condition. These results suggest that cognitive dissonance based on customer service expectations explains a portion of the observed asymmetry in ordering behavior in low margin conditions. This insight into how cognitive dissonance impacts supply chain decision making contributes to behavioral operations management theory. These results inform managerial decisions regarding employee selection, training, task design and reward structures