Cry-wolf syndrome in recommendation

Abstract

In this paper, we examine the effects of the cry-wolf syndrome in a setting where a manufacturer hires a forecaster to make a recommendation on the capacity decision. In this context, we define cry wolf as a behavioral syndrome in which the manufacturer becomes less compliant with a forecaster's valuable recommendation after the forecaster's prior recommendation is known to be ex post nonoptimal. We find that, although the cry-wolf syndrome unequivocally leads to lower performance for the manufacturer when the forecaster's forecast ability is exogenous, cry wolf can help boost the forecaster's investment in improving forecast ability when the ability can be endogenously determined by the forecaster and, thus, benefit the manufacturer. Moreover, cry wolf can improve the performance of the system—the manufacturer and forecaster together—when the commission that the manufacturer pays to the forecaster is not low. Our findings are helpful for understanding the conditions under which cry wolf can be detrimental or beneficial, and for indicating the need for caution with regard to actions curtailing the cry-wolf syndrome among managers.