Do random errors explain newsvendor behavior?

Abstract

Previous experimental work showed that newsvendors tend to order closer to mean demand than prescribed by the normative critical fractile solution. A recently proposed explanation for this mean ordering behavior assumes that the decision maker commits random choice errors, and predicts the mean ordering pattern because there is more room to err toward mean demand than away from it. Do newsvendors exhibit mean ordering simply because they make random errors? We subject this hypothesis to anempirical test that rests onthe fact that the random error explanation is insensitive to context. Our results strongly support the existence of contextsensitive decision strategies that rely directly on (biased) order-to-demand mappings, such as mean demand anchoring, demand chasing, and inventory error minimization. © 2010 INFORMS.