1. The Framing Effect on Inventory
Prepositioning Decisions
Jaime A. Castañedaa, b
Institute of Management (IMA), University of Lugano
castanej@usi.ch
Advisor
Prof. Paulo Gonçalves
started: 2009 – Year of planned completion: 2013
aYear
bHome discipline: Behavioral Operations Management
2012 ISCRAM Summer School
Tilburg, The Netherlands
1
August 15th – 24th, 2012

2. Newsvendor Model decisions
• Ordering decision under demand uncertainty
• You order x units of a given item to sell later on
without knowing its demand beforehand
• Yet you know…
• The demand distribution
• Cost of over stocking (cost of ordered items you
don’t sell)
• Cost of under stocking (cost of not meeting the
demand, i.e., forgone sales)
2

3. Newsvendor Model decisions
DECEMBER
1 2 3 4 5 6 7
8 9 1011121314
15161718192021
22232425262728
293031
3

4. Newsvendor Model decisions
Ordering too many…
DECEMBER
1 2 3 4 5 6 7
8 9 1011121314
15161718192021
22232425262728
293031
4

5. Newsvendor Model decisions
Ordering too few…
DECEMBER
1 2 3 4 5 6 7
8 9 1011121314
15161718192021
22232425262728
293031
5

6. Inventory prepositioning
• Ordering decision under demand uncertainty
• You preposition x units of a given item to prepare
for future emergencies
• Yet you know…
• The demand distribution
• Cost of over stocking (cost of prepositioned items
you don’t use)
• Cost of under stocking (additional cost of meeting
unmet demand, i.e., expediting cost)
• Newsvendor Model decision! 6

7. Newsvendor Model decisions
• What people are expected to do?
Optimal order*
High
(c = 3; p = 12) 75
Safety stock
Low
(c = 9; p = 12) 25
*Based on a D ~ U(0,100)
• What do people typically do?
• Order less than the optimum of high safety stock
(cheap, i.e., cover stocking < cunder stocking) items
• Order more than the optimum of low safety stock
(expensive, i.e., cover stocking > cunder stocking) items 7

8. Hypothesis
• The Framing Effect matters!
• Risk reflection based on framing: people will tend
to preposition a larger amount of items when
outcomes are framed as having an impact on the
amount of human lives lost, and a lower amount
of items when outcomes are framed as having an
impact on the amount of human lives saved,
relative to baseline prepositioning decisions in
which outcomes are framed neutrally
• The Framing Effect as a debiasing
mechanism!
8

9. Methodology
• Laboratory experiment
• Baseline treatment: typical Newsvendor Model
experiment adapted to meet the features of a
prepositioning task
• Positive frame treatment: emphasis on human
lives saved
• Negative frame treatment: emphasis on human
lives lost
9

10. Methodology
10

11. Thank you!
11