Abstract: It is an instructive and helpful analysis to investigate the effects of overconfidence behaviors on members' decision making and profits in a supply chain. The retailers' overconfidence behavior in a typical two echelon supply chain is introduced based on the Newsvendor Model. It discusses the influence of the retailer's overconfidence intensity as well as the market environment variables on its ordering decisions and profits with the assumption that the distribution of market demands is random. It makes a comparative analysis of the retailer's rational profits, expected profits and ideal profits and draws a conclusion that the retailer's overconfidence behavior will lead to the increasing of its ideal profits and the decreasing of its expected profits. It also concludes that the rational supplier's profits will also be influenced by the retailer's overconfidence behavior but he could achieve both members' Pareto improvement by price adjusting under certain conditions. Some examples are given to validate these theoretical analyses and model deductions in the end.

Key words: overconfidence, decision bias, price adjusting, Pareto improvement