Demand Forecast Investment by Overconfident Retailer in Supply Chains

This paper investigates a supply chain setting in which a retailer exhibiting overconfidence invests in demand forecasting. Specifically, the retailer overestimates both the precision of the forecasting signal and the productivity of the investment. We analytically characterize the retailer’s investment behavior and show that overconfidence can lead to overinvestment in forecast accuracy. Beyond the investment decision itself, we examine how overconfidence influences the performance of both supply chain members and the system as a whole. When the retailer withholds forecast information from the supplier, overconfidence tends to harm both the retailer and the overall supply chain. However, under information-sharing arrangements, overconfidence can become beneficial—improving outcomes for the supplier and the system. Notably, when the retailer shares forecast with a sophisticated (strategically responsive) supplier, overconfidence may lead to a win–win outcome, where both parties gain from the retailer’s elevated investment in demand forecasting. These findings offer valuable insights into the conditions under which overconfidence shifts from being a liability to a strategic advantage, enriching our understanding of behavioral factors in supply chain decision-making.