Behavioral multi-lever decision-making: A study of consumer return policy, price, and inventory decisions

Consumer return policies have been long recognized and studied by operations management scholars as an important managerial lever in a retail environment. Yet, the behavioral aspects of return policy decision-making and interaction of return policy decisions with other common operational decisions have not been investigated to date. We present a behavioral analysis of return policy decision-making in a retail environment with aggregate demand and individual product valuation uncertainties. Leveraging a generalized newsvendor context, we conduct a randomized behavioral experiment to understand how individuals make each of the three key retail decisions---refund amount, price, and order quantity---and the causal effect of salvage value on these decisions. We find that decision-makers exhibit behavioral regularities in making decisions across the three levers and they react to changes in the operating conditions in a boundedly rational manner, suggesting the use of heuristics. Based on behavioral regularities that we observe in our data, i.e., responses, time-dependent effects, and decision dependencies, we develop a process theory based on behavioral decision-making tenets that offers a new direction with testable hypotheses for future research. The process theory describes a conditional decision-making heuristic that leads to a propagation of decision errors across different levers as well as lever-specific decision biases.