When Emotions Get in the Way

Published on July 1, 2020

Bauer Ph.D. Student Looks at Emotions and Supply Chain Decisions

One of the hallmarks of many C. T. Bauer College of Business professors and students is that so many have a professional background that informs classroom discussions. The work history enhances their ability to understand how theoretical or academic theories actually play out on the ground floor of various industries.

Santiago Forero, a doctoral student in the Department of Decision & Information Sciences (DISC) at Bauer, spent years working for HP and DHL before coming to the university to earn a Ph.D. His dissertation was singled out for recognition at Bauer’s inaugural doctoral poster contest earlier this year. It tackles a topic observed on the job in virtually all industries: Human emotion often supersedes best practices when it comes to decision-making, ultimately impacting an organization’s bottom line.

In the paper, “When Emotions Get in the Way: An Experimental Analysis of Regret in the Newsvendor Problem,” Forero and his co-authors, DISC department chair and Professor Norman Johnson and Associate Professor David X. Peng, hone in on a well-known supply chain phenomenon. After managers miss the mark with an inventory order (requesting too much or too little of a product in order to reach an optimum profit margin) they are apt to fall prone to demand-chasing, adjusting their order toward previous demand realizations even though demand in one period is independent from demand in past periods.

“One of the first things I noticed when I was working, is how people often make decisions in warehouses and distribution centers that don’t seem to be that logical or rational,” Forero said.

He added: “I soon realized that many of the things you learn in college, or study from textbooks are often not used or are adapted due to human judgment. At the end of the day, people are the ones who make the decisions and they rely on many other things – emotions, relationships – to influence how they decide.”

In designing a study to see how emotion might impact demand-chasing, the researchers had participants take on the role of retailers selling widgets. Participants were instructed to order inventory after being given basic information about supplier costs, the company’s sales price and how customer demand was distributed. Afterward, some learned what the actual customer demand had been, while others received only sales figures, giving them less insight into how well they’d correctly chosen their orders. The results showed that those who received actual customer demand and had full disclosure about their performance, felt more regret about the choices they had made, and as a consequence chased demand to a greater extent and more frequently.

Managers who want to diminish the impact regret might have on demand-chasing might consider aggregating data about earlier orders, Forero said. They might also want to provide more information to employees about how emotions impact decision-making.

Forero plans to continue studying the phenomenon. Before coming to Bauer, he earned a bachelor of science degree in Industrial Engineering from Universidad Javeriana and MBA from INALDE Business School in Colombia.

By Julie Bonnin