Economic Order Quantity (EOQ) Inventory Management - Essays in Experimental Economics

Abstract

This thesis consists of six chapters to experimentally study aspects of how levels of individuals’ cognitive stress, cognitive ability and self-regulatory resource affect their decision making under the Economics Order Quantity (EOQ) inventory management environment.
In Chapter 3 we use laboratory experiments to evaluate the effects of cognitive stress on inventory management decisions in a finite horizon economic order quantity model. We manipulate two sources of cognitive stress. First, we vary participants’ participation in a pin memorisation task. This exogenously increases cognitive load. Second, we introduce an intervention to reduce cognitive stress by only allowing participants to order when inventory is depleted. This intervention restricts the policy choice set. Increases in cognitive load negatively impact earnings with and without the intervention, with these impacts occurring in the first year. Participants’ in all treatments tend to adopt near optimal policies. However, only in the intervention and low cognitive load treatment do the majority of choices reach the optimal policy. Our results suggest that higher levels of multitasking lead to lower initial performance when taking on new product lines, and that the benefits of providing support and task simplicity are greatest when the task is first assigned.
In Chapter 4 we use laboratory experiments to evaluate the effects of individuals’ cognitive abilities on their behaviour in a finite horizon economic order quantity model. Participants’ abilities to balance intuitive judgement with cognitive deliberations are measured by the Cognitive Reflection Test (CRT). Participants then complete a sequence of five “annual” inventory management tasks with monthly ordering decisions. Our results show that participants with higher CRT scores on average earn greater profit and choose more effective inventory management policies. However these gaps are transitory as participants with lower CRT scores exhibit faster learning. We also find a significant gender effect on CRT scores. This suggests hiring practices incorporating CRT type of instruments can lead to an unjustified bias.
In Chapter 5 we use laboratory experiments to evaluate the effects of individuals’ ability to self- regulate on inventory management decisions in a finite horizon economic order quantity model. An ego depletion task is implemented aiming to diminish one’s self-regulatory resources. From a psychological point of view, self-control is impaired when the mental resource has been used up over effortful control of responses. In our experiment, participants complete an ego depletion task followed by a sequence of five “annual” inventory management tasks with monthly ordering decisions. Our results show there is no obvious treatment effect on participants’ self-regulation ability.