Journal article
Perceived versus actual value of product substitution flexibility: An experimental investigation
Journal of operations management, Vol.38(1), pp.56-70
09/2015
DOI: 10.1016/j.jom.2015.08.001
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. (C) 2015 Elsevier B.V. All rights reserved.
Details
- Title: Subtitle
- Perceived versus actual value of product substitution flexibility: An experimental investigation
- Creators
- Saurabh Bansal - Pennsylvania State UniversityBrent Moritz - Pennsylvania State University
- Resource Type
- Journal article
- Publication Details
- Journal of operations management, Vol.38(1), pp.56-70
- DOI
- 10.1016/j.jom.2015.08.001
- ISSN
- 0272-6963
- eISSN
- 1873-1317
- Publisher
- Wiley
- Number of pages
- 15
- Grant note
- Smeal Research Grant
- Language
- English
- Date published
- 09/2015
- Academic Unit
- Business Analytics
- Record Identifier
- 9985219301002771
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