Beyond pull-to-center: how system neglect shapes ordering decisions under shifting demand

We examine how decision makers adjust newsvendor ordering decisions in response to demand signals that are indicative of a demand shift. Demand shifts driven by market changes, seasonality, or external shocks create uncertainty that decision makers frequently encounter in practice. By integrating models that explain the well-known pull-to-center (PTC) effect in static newsvendor environments with models of system neglect that explain how probability judgments react to signals indicative of a demand shift, we predict when PTC and system neglect mitigate versus amplify one another. Specifically, for high-margin products in stable environments with noisy signals and low-margin products in unstable environments with precise signals, system neglect and PTC effect tend to counteract each other, resulting in ordering decisions closer to optimal levels. In the remaining profit margin and demand environments, system neglect amplifies the underordering and overordering behavior resulting from the PTC effect. We test these predictions in experimental settings with uncensored and censored demand signals and find support for our model predictions. We explore the effectiveness of decision support systems and discuss implications for providing managerial interventions in environments with salient demand shifts.