Behavioral Ordering, Competition and Profits: An Experimental Investigation

We investigate the impact of behavioral ordering on a firm’s profits. Specifically, since most firms operate in competitive markets, we evaluate the differences in profits between a behavioral competitor at which a human is placing orders, and a management science-driven competitor at which orders are decided according to a plausible policy based on existing literature and managerial practice. In contrast to the current literature which documents profit losses of 1-5% (in isolated cases), we show that profit losses under competition are 20-60%, an order of magnitude larger. We explain the causes of such large differences in profits, and show that they are primarily driven by suboptimal ordering of behavioral decision makers rather than by the sophistication of their management-science-driven competitors. Our results send a clear message to business executives, and highlight the importance of considering (and correcting) behavioral biases in ordering decisions of their inventory managers.