Research On The Impact Of Cognitive Bias In Demand Forecasting Process On Firms’ Performance

Demand forecasting is an important and necessary procedure towards effective operations management.Most decision-makers have cognitive bias and their cognitive bias will influence their judgement about demand.This paper studies how firms’ cognitive bias in demand forecasting process influences firms’ performance.This paper first considers the quantity competition among bilateral unbiased firms/unilateral biased firms/ bilateral biased firms with symmetric information and then discusses a hiring game among firms.Then,this paper further considers the quantity competition among biased firms with unilateral or bilateral asymmetric information and discusses an information disclosure game among firms.Firstly,this paper shows that the “bright” side of cognitive bias.When the information about firms’ cognitive bias is symmetric,a firm can obtain benefit from its slight pessimism when its competitor is highly optimistic and from its slight optimism when its competitor is other type.From the perspective of the whole system,more biased firms in the system may promote the total outcomes.When the information is asymmetric,a firm can still obtain a higher profit because of its proper cognitive bias,except when the firm knows its competitor’s information but its competitor does not know the firm’s information.Then,this paper finds that “dark” side of firms’ private information about their cognitive bias.Although both firms and the system can benefit from a firm’s concealing private information under some condition,a firm can get hurt and its competitor obtain benefit because the firm conceals information under other different condition.This paper detailly shows both bright and dark sides of the cognition information and provides a basis for firms to conceal or disclose their cognition information.Furthermore,this paper provides some insights about the employment strategies and the information disclosure strategies.If the biased candidate of a firm is slightly optimistic,a firm should employ the biased candidate as its manager to forecast demand regardless of its competitor’s decision.When both firms’ biased candidates are slightly optimistic,both firms hire biased candidates in the equilibrium.But the equilibrium is a prisoners’ dilemma,which can explain the phenomenon that firms may suffer loss from strategically hiring biased managers.When firms are extremely relatively pessimistic or highly relatively optimistic,both firms proactively disclose private information in the equilibrium.This paper points out that firms may indirectly share demand information by disclosing their cognition information in the equilibrium and provides a new view of horizontal demand information sharing and complements the literature of demand information sharing.