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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 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.

Suggested Citation

  • Herweg, Fabian, 2012. "The Expectation-Based Loss-Averse Newsvendor," Discussion Papers in Economics 14065, University of Munich, Department of Economics.
    • Handle: RePEc:lmu:muenec:14065
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    References listed on IDEAS

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    Keywords

    behavioral operations management; inventory decision; loss aversion; newsvendor;
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