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Biased Judgment in Censored Environments

Listed author(s):
  • Daniel C. Feiler

    ()

    (Tuck School of Business, Dartmouth College, Hanover, New Hampshire 03755)

  • Jordan D. Tong

    ()

    (Wisconsin School of Business, University of Wisconsin-Madison, Madison, Wisconsin 53706)

  • Richard P. Larrick

    ()

    (Fuqua School of Business, Duke University, Durham, North Carolina 27708)

Registered author(s):

    Some environments constrain the information that managers and decision makers can observe. We examine judgment in censored environments where a constraint, the censorship point , systematically distorts the observed sample. Random instances beyond the censorship point are observed at the censorship point, whereas uncensored instances are observed at their true value. Many important managerial decisions occur in censored environments, such as inventory, risk taking, and employee evaluation decisions. In this research, we demonstrate a censorship bias --individuals tend to rely too heavily on the observed censored sample, biasing their belief about the underlying population. We further show that the censorship bias is exacerbated for higher degrees of censorship, higher variance in the population, and higher variability in the censorship points. In four studies, we find evidence of the censorship bias across the domains of demand estimation and sequential risk taking. The bias causes individuals to make costly decisions and behave in an overly risk-averse manner. This paper was accepted by Teck Ho, judgment and decision making.

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    File URL: http://dx.doi.org/10.1287/mnsc.1120.1612
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    Article provided by INFORMS in its journal Management Science.

    Volume (Year): 59 (2013)
    Issue (Month): 3 (January)
    Pages: 573-591

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    Handle: RePEc:inm:ormnsc:v:59:y:2013:i:3:p:573-591
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    11. Rachel Croson & Karen Donohue, 2006. "Behavioral Causes of the Bullwhip Effect and the Observed Value of Inventory Information," Management Science, INFORMS, vol. 52(3), pages 323-336, March.
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    13. Nils Rudi & David Drake, 2009. "Observation bias: The impact of demand censoring on newsvendor level and adjustment behavior," Harvard Business School Working Papers 12-042, Harvard Business School, revised Dec 2011.
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