Measuring over-confidence in supply management: an application to purchasing decisions

Overconfidence has been shown to be a significant explanation of behaviour in diverse managerial settings. We explore the relevance of over-confidence for supply chain management. We run a series of human experiments that explore the role of overconfidence in ordering decisions within the framework of the classic Beer Game. Unlike previous experimental studies, participants were knowledgeable about supply chain management, being either graduate students with a background in Operations Management or professional purchasing managers. Results show that overconfidence affects the behaviour of participants, and that is related to environmental uncertainty. In particular, the study supports the view that over-confidence may spur supply chain managers to be less careful in the management of supplies and thus incur more costs. A first implication for organizations is that managers should be trained to discount their expectations of success by removing optimistic biases. A second is the importance of providing managers and employees with benchmarks that allow them to correctly assess their performance in relative terms. The study also underlines the effect of environmental uncertainty as a moderator between whatever cognitive and psychological factors cause over-confidence and the strength of over-confidence itself.