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Prospect Theory and the Newsvendor Problem

Author

Listed:
  • Mahesh Nagarajan

    (Sauder School of Business, University of British Columbia, Vancouver, British Columbia V6T 1Z2, Canada)

  • Steven Shechter

    (Sauder School of Business, University of British Columbia, Vancouver, British Columbia V6T 1Z2, Canada)

Abstract

The newsvendor problem is a fundamental decision problem in operations management. Various independent experimental studies in laboratory settings have shown similar deviations from the theoretical optimal order quantity. We clarify that Prospect Theory, a prevalent framework for decision making under uncertainty, cannot explain the consistent empirical findings. This paper was accepted by Yossi Aviv, operations management.

Suggested Citation

  • Mahesh Nagarajan & Steven Shechter, 2014. "Prospect Theory and the Newsvendor Problem," Management Science, INFORMS, vol. 60(4), pages 1057-1062, April.
    • Handle: RePEc:inm:ormnsc:v:60:y:2014:i:4:p:1057-1062
    DOI: 10.1287/mnsc.2013.1804
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    References listed on IDEAS

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