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A note on the risk aversion of informed newsvendors

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  • Michael Becker-Peth
  • Ulrich W. Thonemann
  • Torsten Gully

Abstract

The order behaviour of newsvendors has been extensively analysed in the behavioural operations literature and a robust observation has been that average order quantities are between expected-profit-maximising quantities and mean demand. This “pull-to-center” effect has been explained by anchoring, demand-chasing, inventory error minimisation, and other decision heuristics and biases. Risk preferences have been ruled out as an explanation of order behaviour, which we believe might have been premature. Risk preferences vary between people and understanding the effect of risk preferences on ordering requires an analysis at the individual level and not only on the group level, which is the dominant approach used in the literature. In a controlled laboratory experiment, we measure individual risk preferences and analyse how they relate to order quantities. We find a significant correlation between individual risk preferences and order quantities, which indicates that risk preferences affect order behaviour. We also test how information about the effect of order quantities on the profit distribution affects ordering and find only a marginal moderation effect. Furthermore, our analyses show no mediation effect of risk preferences by gender, but a significant level effect of gender: female subjects anchor more on mean demand than male subjects.

Suggested Citation

  • Michael Becker-Peth & Ulrich W. Thonemann & Torsten Gully, 2018. "A note on the risk aversion of informed newsvendors," Journal of the Operational Research Society, Taylor & Francis Journals, vol. 69(7), pages 1135-1145, July.
    • Handle: RePEc:taf:tjorxx:v:69:y:2018:i:7:p:1135-1145
    DOI: 10.1080/01605682.2017.1390525
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    Citations

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    Cited by:

    1. Michael Becker‐Peth & Kai Hoberg & Margarita Protopappa‐Sieke, 2020. "Multiperiod Inventory Management with Budget Cycles: Rational and Behavioral Decision‐Making," Production and Operations Management, Production and Operations Management Society, vol. 29(3), pages 643-663, March.
    2. Eroglu, Cuneyt & Hofer, Christian & Hofer, Adriana Rossiter & Hou, Young, 2023. "“Cultural inventories”: How dimensions of national culture moderate the effect of demand unpredictability on firm-level inventories," International Journal of Production Economics, Elsevier, vol. 264(C).
    3. Samuel N. Kirshner & Brent B. Moritz, 2023. "For the future and from afar: Psychological distance and inventory decision‐making," Production and Operations Management, Production and Operations Management Society, vol. 32(1), pages 170-188, January.
    4. Zuzana Brokesova & Cary Deck & Jana Peliova, 2022. "Pull-to-center is not just for newsvendors," PLOS ONE, Public Library of Science, vol. 17(2), pages 1-16, February.
    5. Bonzelet, Sabrina, 2022. "How increasing relative risk aversion affects retailer orders under coordinating contracts," International Journal of Production Economics, Elsevier, vol. 251(C).

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