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August 23, 2014
 
 
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Centre for Supply Chain Management

CMA Canada Supply Chain Management Seminar Series: Loss Aversion in the Newsvendor Problem and Supply Chains


Wang, C.

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

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