Centre for Supply Chain Management
CMA Canada Supply Chain Management Seminar Series: Loss Aversion in the Newsvendor Problem and Supply Chains
published: 2005 | Research publication | CMA Canada Supply Chain Manageme
ABSTACT: Newsvendor models are widely used in the literature, and usually based upon the assumption of risk neutrality. This paper models manager’s decision-making behavior in the single-period newsvendor problem within the Prospect Theory framework, which widely applies in finance and economic fields. We find that if shortage cost is not negligible, then a loss-averse newsvendor may order more than a risk-neutral newsvendor. We also find that the loss-averse newsvendor’s optimal order quantity may increase in wholesale price and decrease in retail price, which can never occur in the risk-neutral newsvendor model.
revised Nov 21/05