Handbook of behavioral operations management-3.pdf - Chapter 5 Review of Individual Decision Making Handbook of Behavioral Operations Management Andrew

Handbook of behavioral operations management-3.pdf -...

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Chapter 5: Review of Individual Decision Making Handbook of Behavioral Operations Management Andrew M. Davis Samuel Curtis Johnson Graduate School of Management, Cornell University, Ithaca, NY 14853 [email protected] [Preliminary Draft] September 2, 2016 1. Introduction When making operational choices, managers may be influenced by a number of behavioral tenden- cies. For instance, a planning manager, when constructing a forecast distribution for a product, could be susceptible to overconfidence and underestimate the variance of demand. Or a procure- ment director, when deciding how best to bid for a particular component, may expect to feel regret if they bid too high and obtain the component at a higher price than necessary. Or an executive, in the middle of a lengthy project that requires future investment to complete, could fall prey to a sunk cost bias and make a poor decision. Fortunately, there is an extensive literature in both psychology and experimental economics that can inform us and help determine what specific biases may be responsible for any observed operational decisions. In this chapter, I will attempt to convey a summary of what I believe are the most relevant results from these two streams of literature, specifically focusing on one-shot, individual decisions. The literature on individual decision making in psychology and experimental economics is vast. Therefore, rather than provide an extensive list of all results from both fields, this chapter is meant to highlight some of the more prevalent behavioral biases that have been well-established, and illustrate how they have been (or can be) used to help explain results in behavioral operations management contexts. 1 . In terms of application, the primary focus will be on human-subject 1 For those interested in further results of individual decision making in psychology and experimental economics, there are a number of useful references, including Daniel Kahneman, Paul Slovic, and Amos Tversky’s Judgment Under Uncertainty: Heuristics and Biases (1982), and Colin Camerer’s individual decision making chapter in the Handbook of Experimental Economics (1995). 1
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experiments, but the results can also extend to field experiments, behavioral modeling, and more general empirical studies as well. In order to describe the overall framework for this chapter, let me briefly refer to what I believe is the most common approach for modeling individual decisions in operations management: expected utility theory. For a (very) short history, expected utility theory originated in the early 18th century, with the St. Petersburg paradox. The St. Petersburg paradox involves a game where a fair coin is tossed repeatedly, with earnings starting at $2 and doubling every time a head appears ($2, $4, $8, etc). Once a tail appears, the game ends and the player wins their total earnings.
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