Pull-to-center is not just for newsvendors

Area of Science:

• Behavioral Economics
• Operations Research
• Experimental Economics

Background:

• The newsvendor problem is a classic inventory management scenario.
• A common finding is the 'pull-to-center' effect, where ordering quantities deviate from optimal levels.
• Existing explanations for this effect are broadly categorized into task structure and inventory context.

Purpose of the Study:

• To differentiate between task structure and inventory context explanations for the pull-to-center effect.
• To compare decision-making in a newsvendor game with a mathematically isomorphic price gouging game.

Main Methods:

• Laboratory experiments were conducted using two distinct games: a standard newsvendor game and a novel price gouging game.
• The price gouging game was designed to be mathematically isomorphic to the newsvendor game.
• Behavioral patterns in both games were systematically recorded and compared.

Main Results:

• Experimental results replicated the well-documented pull-to-center effect in the newsvendor game.
• An equivalent pull-to-center pattern was observed in the price gouging game.
• The findings demonstrate a consistent behavioral response across mathematically similar, yet contextually different, tasks.

Conclusions:

• The pull-to-center effect in newsvendor experiments is likely driven by structural properties of the decision task.
• Explanations rooted in prospect theory and impulse balance models are supported.
• Context-specific explanations related solely to inventory management are less likely to be the primary cause.