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The Expectation-Based Loss-Averse Newsvendor

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  • Herweg, Fabian

Abstract

We modify the classic single-period inventory management problem by assuming that the newsvendor is expectation-based loss averse according to Köszegi 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.

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Bibliographic Info

Paper provided by Free University of Berlin, Humboldt University of Berlin, University of Bonn, University of Mannheim, University of Munich in its series Discussion Paper Series of SFB/TR 15 Governance and the Efficiency of Economic Systems with number 389.

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Date of creation: 01 Oct 2012
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Handle: RePEc:trf:wpaper:389

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Keywords: behavioral;

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References

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  1. Johannes Abeler & Armin Falk & Lorenz Götte & David Huffman, 2009. "Reference Points and Effort Provision," CESifo Working Paper Series 2585, CESifo Group Munich.
  2. Syngjoo Choi & Raymond Fisman & Douglas Gale & Shachar Kariv, 2007. "Consistency and Heterogeneity of Individual Behavior under Uncertainty," American Economic Review, American Economic Association, American Economic Association, vol. 97(5), pages 1921-1938, December.
  3. Fabian Herweg & Daniel Müller & Philipp Weinschenk, 2010. "Binary Payment Schemes: Moral Hazard and Loss Aversion," Working Paper Series of the Max Planck Institute for Research on Collective Goods 2010_38, Max Planck Institute for Research on Collective Goods.
  4. Fabian Herweg, 2010. "Uncertain Demand, Consumer Loss Aversion, and Flat-Rate Tariffs," Bonn Econ Discussion Papers, University of Bonn, Germany bgse14_2010, University of Bonn, Germany.
  5. Louis Eeckhoudt & Christian Gollier & Harris Schlesinger, 1995. "The Risk-Averse (and Prudent) Newsboy," Management Science, INFORMS, INFORMS, vol. 41(5), pages 786-794, May.
  6. Wang, Charles X. & Webster, Scott & Suresh, Nallan C., 2009. "Would a risk-averse newsvendor order less at a higher selling price?," European Journal of Operational Research, Elsevier, Elsevier, vol. 196(2), pages 544-553, July.
  7. Botond Koszegi & Matthew Rabin, 2004. "A Model of Reference-Dependent Preferences," Method and Hist of Econ Thought, EconWPA 0407001, EconWPA.
  8. Botond Koszegi & Matthew Rabin, 2007. "Reference-Dependent Risk Attitudes," American Economic Review, American Economic Association, American Economic Association, vol. 97(4), pages 1047-1073, September.
  9. Wang, Charles X. & Webster, Scott, 2009. "The loss-averse newsvendor problem," Omega, Elsevier, vol. 37(1), pages 93-105, February.
  10. Karle, Heiko & Peitz, Martin, 2012. "Competition under Consumer Loss Aversion," Working Papers 12-08, University of Mannheim, Department of Economics.
  11. Herweg, Fabian & Müller, Daniel & Weinschenk, Philipp, 2010. "Binary payment schemes: Moral hazard and loss aversion," Munich Reprints in Economics, University of Munich, Department of Economics 19450, University of Munich, Department of Economics.
  12. Keith M. Marzilli Ericson & Andreas Fuster, 2011. "Expectations as Endowments: Evidence on Reference-Dependent Preferences from Exchange and Valuation Experiments," The Quarterly Journal of Economics, Oxford University Press, vol. 126(4), pages 1879-1907.
  13. Maurice E. Schweitzer & Gérard P. Cachon, 2000. "Decision Bias in the Newsvendor Problem with a Known Demand Distribution: Experimental Evidence," Management Science, INFORMS, INFORMS, vol. 46(3), pages 404-420, March.
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Cited by:
  1. Fabian Herweg & Heiko Karle & Daniel Müller, 2014. "Incomplete Contracting, Renegotiation, and Expectation-Based Loss Aversion," CESifo Working Paper Series 4687, CESifo Group Munich.

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