Cognition and Individual Differences in the Newsvendor Problem: Behavior Under Dual Process Theory

Previous research has shown that individuals systematically and persistently deviate from the profit maximizing quantity when solving a newsvendor problem. This research posits that Dual Process Theory provides an underlying cognitive explanation for why individuals deviate from optimality. More specifically, this research explores the relationship between individual performance and a Dual Process Theory construct called cognitive reflection, which can be measured by the Cognitive Reflection Test (CRT). We experimentally test the relationship between cognitive reflection and newsvendor decision-making using 313 experienced supply chain professionals. We find statistically significant results showing that cognitive reflection is related to performance as measured by expected profit, order quantity, and order quantity variance. Cognitive reflection is also related to anchoring heuristics and preference to reduce ex post inventory error. Other potential explanations of individual heterogeneity, including college major, years of experience, and managerial position, are also evaluated and found to be less informative than CRT scores. These results suggest that Dual Process Theory contributes to a theoretical understanding of supply chain decision-making. These results can be used to inform managerial decisions regarding employee selection, training, task design, and decision support systems.