Perceived versus actual value of product substitution flexibility: An experimental investigation

Research output: Contribution to journalArticle

6 Citations (Scopus)

Abstract

Prior literature suggests that in the presence of operational uncertainties such as uncertain demand, firms should deploy operational flexibilities. However, these flexibilities are costly to develop and a correct valuation of these capabilities is necessary to ensure that they are only deployed when the expected benefits exceed the cost. Using a set of behavioral decision-making experiments for inventory of substitutable products, we investigate how decision-makers perform when estimating the value of operational flexibility of product substitution. We found that subjects consistently overestimated the monetary value of product substitution. Furthermore, the overestimation became more acute as demand correlation increased. This behavior is not explained by risk aversion or random errors. Instead, it appears to be driven by fundamental and systematic behavioral biases when estimating the conjunctive probability of substitution. We suggest and validate a decomposition-based approach to mitigate this overestimation.

Original languageEnglish (US)
Pages (from-to)56-70
Number of pages15
JournalJournal of Operations Management
Volume38
DOIs
StatePublished - Sep 1 2015

Fingerprint

Substitution reactions
Random errors
Decision making
Decomposition
Operational flexibility
Product substitution
Costs
Experiments
Decision maker
Uncertain demand
Risk aversion
Experiment
Behavioral biases
Uncertainty
Substitution
Demand correlation
Random error
Behavioral decision making

All Science Journal Classification (ASJC) codes

  • Strategy and Management
  • Management Science and Operations Research
  • Industrial and Manufacturing Engineering

Cite this

@article{bd3d898243cd43f6af3d408f60016b6b,
title = "Perceived versus actual value of product substitution flexibility: An experimental investigation",
abstract = "Prior literature suggests that in the presence of operational uncertainties such as uncertain demand, firms should deploy operational flexibilities. However, these flexibilities are costly to develop and a correct valuation of these capabilities is necessary to ensure that they are only deployed when the expected benefits exceed the cost. Using a set of behavioral decision-making experiments for inventory of substitutable products, we investigate how decision-makers perform when estimating the value of operational flexibility of product substitution. We found that subjects consistently overestimated the monetary value of product substitution. Furthermore, the overestimation became more acute as demand correlation increased. This behavior is not explained by risk aversion or random errors. Instead, it appears to be driven by fundamental and systematic behavioral biases when estimating the conjunctive probability of substitution. We suggest and validate a decomposition-based approach to mitigate this overestimation.",
author = "Saurabh Bansal and Moritz, {Brent B.}",
year = "2015",
month = "9",
day = "1",
doi = "10.1016/j.jom.2015.08.001",
language = "English (US)",
volume = "38",
pages = "56--70",
journal = "Journal of Operations Management",
issn = "0272-6963",
publisher = "Elsevier",

}

TY - JOUR

T1 - Perceived versus actual value of product substitution flexibility

T2 - An experimental investigation

AU - Bansal, Saurabh

AU - Moritz, Brent B.

PY - 2015/9/1

Y1 - 2015/9/1

N2 - Prior literature suggests that in the presence of operational uncertainties such as uncertain demand, firms should deploy operational flexibilities. However, these flexibilities are costly to develop and a correct valuation of these capabilities is necessary to ensure that they are only deployed when the expected benefits exceed the cost. Using a set of behavioral decision-making experiments for inventory of substitutable products, we investigate how decision-makers perform when estimating the value of operational flexibility of product substitution. We found that subjects consistently overestimated the monetary value of product substitution. Furthermore, the overestimation became more acute as demand correlation increased. This behavior is not explained by risk aversion or random errors. Instead, it appears to be driven by fundamental and systematic behavioral biases when estimating the conjunctive probability of substitution. We suggest and validate a decomposition-based approach to mitigate this overestimation.

AB - Prior literature suggests that in the presence of operational uncertainties such as uncertain demand, firms should deploy operational flexibilities. However, these flexibilities are costly to develop and a correct valuation of these capabilities is necessary to ensure that they are only deployed when the expected benefits exceed the cost. Using a set of behavioral decision-making experiments for inventory of substitutable products, we investigate how decision-makers perform when estimating the value of operational flexibility of product substitution. We found that subjects consistently overestimated the monetary value of product substitution. Furthermore, the overestimation became more acute as demand correlation increased. This behavior is not explained by risk aversion or random errors. Instead, it appears to be driven by fundamental and systematic behavioral biases when estimating the conjunctive probability of substitution. We suggest and validate a decomposition-based approach to mitigate this overestimation.

UR - http://www.scopus.com/inward/record.url?scp=84946836579&partnerID=8YFLogxK

UR - http://www.scopus.com/inward/citedby.url?scp=84946836579&partnerID=8YFLogxK

U2 - 10.1016/j.jom.2015.08.001

DO - 10.1016/j.jom.2015.08.001

M3 - Article

AN - SCOPUS:84946836579

VL - 38

SP - 56

EP - 70

JO - Journal of Operations Management

JF - Journal of Operations Management

SN - 0272-6963

ER -