How Does Overconfidence Affect Decision Making of the Green Product Manufacturer?

Abstract EN

Overconfidence is a universal and prevalent cognitive bias affecting decision making in operation management.

In this paper, overconfidence is defined as a cognitive bias in which decision makers overestimate the accuracy of demand forecasting or (and) the demand itself.

We call these two behaviors overprecision and overestimation, respectively.

In order to explore how overconfidence affects decision making of the green product manufacturer, we build the demand function based on the manufacturer’s overconfidence and establish a newsboy-based model.

Then the influence of overconfidence on product greenness, output, and profit is mainly discussed.

We have several new sights as follows.

First, overconfidence makes the manufacturer produce greener products than the rational manufacturer, and overestimation results in a higher greenness deviation than overprecision.

Second, the influence of overconfidence on the output of green products is quite different from that of nongreen products.

Specifically speaking, overestimation makes the manufacturer produce more products than the rational manufacturer, so do the overprecision manufacturer and the dual-overconfident manufacturer under the low-profit condition.

But in high-profit condition, when greening investment factor is low and (or) consumers are sensitive enough to greenness, the overprecision manufacturer produces more than the rational manufacturer; when the level of overestimation exceeds a threshold, output of the dual-overconfident is greater than that of the rational manufacturer.

Third, overconfidence makes the real profit of the manufacturer less than optimal profit of the rational manufacturer.

There is a positive cross-effect of overprecision and overestimation in real profit of the dual-overconfident manufacturer.

That is, to some extent, one kind of overconfidence can offset the decline in profit caused by the other kind of overconfidence.