A Behavioral Remedy for the Censorship Bias

Abstract

Existing evidence suggests that managers exhibit a censorship bias: demand beliefs tend to be biased low when lost sales from stockouts are unobservable (censored demand) compared to when they are observable (uncensored demand). We develop a non‐constraining, easily implementable behavioral debias technique to help mitigate this tendency in demand forecasting and inventory decision‐making settings. The debiasing technique has individuals record estimates of demand outcomes (REDO): participants explicitly record a self‐generated estimate of every demand realization, allowing them to record a different value than the number of sales in periods with stockouts. In doing so, they construct a more representative sample of demand realizations (that differs from the sales sample). In three laboratory experiments with MBA and undergraduate students, this remedy significantly reduces downward bias in demand beliefs under censorship and leads to higher inventory order decisions.

Behavioral Operations and Supply Chain Management–A Review and Literature Mapping

“…Studies have been completed on judgmental forecasts (Sanders & Ritzman, ; Kremer, Moritz, & Siemsen, ; Moritz, Siemsen, & Kremer, ; Seifert, Siemsen, Hadida, & Eisingerich, ; Kremer, Siemsen, & Thomas, ; Petropoulos, Kourentzes, Nikolopoulos, & Siemsen, ), judgmental adjustments to forecasts (Önkal, Gönül, & Lawrence, ), human behavior in the use of forecast support systems (Hoch & Schkade, ), overconfident forecasts (Grushka‐Cockayne, Jose, & Lichtendahljr, ), and the role of trust and incentives in forecast sharing (Terwiesch, Ren, Ho, & Cohen, ; Özer, Zheng, & Chen, ; Özer, Zheng, & Ren, ; Scheele, Thonemann, & Slikker, ). In a recent study, Tong, Feiler, and Larrick () investigated demand censorship bias in the newsvendor setting and techniques to reduce it.…”

Effects of personality on the efficacy of judgmental adjustments of statistical forecasts

“…In addition, our findings can help in the development of forecasting support systems where match between system and user characteristics is an important factor (Asimakopoulos and Dix, 2013). For example, recent research has looked at implementable behavioral debiasing techniques to remedy biases in judgmental forecasting (Tong et al, 2018). These techniques, which involve behavioral management of participants, have been shown to be effective in reducing forecast biases in an initial study.…”

Inventory decision-making biases: a review and suggestions for future research

“…To mitigate the tendency of demand forecasting in censorship bias, Tong et al (2018) developed a behavioural debiasing technique in which an individual records the estimates of demand outcomes (REDO) with values different than the number of sales in periods with stock-outs. This helps in constructing a representative sample of demand realisations that is different from sales sample.…”

“…They noticed that REDO reduces only the demand beliefs due to censorship, it does not reduce the bias that are present in known and uncensored demand distributions. Researchers may examine the effectiveness of the remedy suggested by Tong et al (2018) to mitigate the newsvendor biases (pull-to-center or demand chasing) and other biases related to demand beliefs with unknown and censored demand in the future. Further, most of the studies on analysing the impact of censored demand on newsvendor decision-making follow an analytical approach and there are only few experimental studies available to understand the manager's decision-making behaviour.…”