The Expectation-Based Loss-Averse Newsvendor

Herweg, Fabian (October 2012): The Expectation-Based Loss-Averse Newsvendor. Discussion Papers in Economics 2012-23

Abstract

We modify the classic single-period inventory management problem by assuming that the newsvendor is expectation-based loss averse according to Koszegi and Rabin (2006, 2007). Expectation-based loss aversion leads to an endogenous psychological cost of leftovers as well as stockouts. If there are no monetary stockout costs, then the loss-averse newsvendor orders a quantity lower than the quantity ordered by a profit-maximizing newsvendor. If there are positive monetary costs associated with stockouts, then the loss-averse newsvendor places suboptimal orders, which can be either too high or too low.

• Item Type: Paper
• Keywords: behavioral operations management, inventory decision, loss aversion, newsvendor
• Faculties: Economics; Economics > Munich Discussion Papers in Economics
• Subjects: 300 Social sciences > 300 Social sciences, sociology and anthropology; 300 Social sciences > 330 Economics
• Language: English

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