A new study from faculty at Mays Business School provides critical insights into the behavioral aspects of return policy decision-making in the retail industry. The study conducted by Dr. Rogelio Oliva and two former Mays PhD students, Han Kyul Oh (Tilburg University) and Huseyn Abdulla (the University of Tennessee, Knoxville) provides insights into how managers make interconnected operational decisions on consumer return policies, pricing and inventory levels. Published in the Journal of Operations Management, their research is one of the first to examine joint decision-making across multiple business levers.

To understand these decision-making processes, the researchers designed a simulated retail environment where study participants made decisions on refund amounts for returned products, product prices and inventory levels. The experiment involved 136 managers who made repeated decisions across 30 rounds.The results revealed several key findings: First, managers deviated substantially from theoretical profit-maximizing benchmarks for all three decisions. They tended to order too much or too little inventory, price below optimal levels and offer refunds that were too high or low.

Second, managers adjusted decisions in response to changes in salvage value, which is the amount a retailer can recover by reselling returned products. For example, increases in salvage value led managers to order more inventory, raise prices and offer more generous refunds. However, the adjustments were insufficient compared to profit-maximizing levels.

Third, managers tended to make decisions sequentially, with refund policies impacting pricing, which then affected inventory planning. Errors seemed to propagate across the decisions. The researchers say this “conditional decision-making” reflects a heuristic managers apply to reduce complexity.

“We found that individuals can react reasonably to changes in business conditions, but they are subject to specific biases when making each decision,” explained Dr. Oliva. “These biases spill over across decisions and lead to significant profit losses.”

To explain the observed behaviors, the researchers propose a process theory grounded in psychological concepts like anchoring, adjustment, satisficing and entitlement norms. “Our theory provides a narrative account of the decision-making process and outlines testable hypotheses for future research,” said Dr. Oliva. 

The findings have important implications for managers across industries like retail, manufacturing and services that rely on interconnected operational decisions. Understanding common decision biases can help managers make more balanced tradeoffs across business levers and improve overall performance.

This study highlights opportunities for future studies to examine group decision-making, use of decision aids and other strategies to improve multi-lever operational planning. “With more data-driven insights, we can design organization policies and training to make better decisions,” concluded Dr. Oliva.