Behavioral Financial Aspects of Inventory Management: Dynamics and Competition

Abstract

Many companies have to make inventory decisions facing competition and demand uncertainty, and the way these inventory decisions are made affects the companies’ profitability. A useful decision tools facing demand uncertainty is newsvendor model. The recent studies have revealed the divergence of real managers’ decisions from the inventory management model optimal decisions due to different behavioral biases. The goal of the thesis is to develop and test the new extension of the inventory management model (dynamic newsvendor model) under competition and demand uncertainty. Within the extension a ‘behavioral’ parameter is introduced. The test of the model extension using the results of a controlled experiment has shown that the real people are biased in a way of putting subjective ‘weights’ on current periods profit and future periods expected profit. The different values of the behavioral parameter for different people show that people are inclined to different extent to the revealed bias and it can be dependent on their individual characteristics, such as gender, year of university study/experience, etс.