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Loss aversion and rationality in the newsvendor problem under recourse option
Published in Elsevier B.V.
2017
Volume: 261
   
Issue: 2
Pages: 563 - 571
Abstract
Risk neutral assumption in the newsvendor problem under recourse option predicts the order quantity insensitive to the selling price; and, risk aversion modeled through common utility functions gives decreasing order quantity with increasing selling price. In this paper, we consider loss aversion to model the choice preference of the decision maker in the newsvendor problem under recourse option, and prove that loss aversion predicts the rational ordering behavior of the newsvendor with respect to the changes in price and cost parameters. Further, we find that loss aversion can significantly improve the performance of utility function based models in predicting the rational behavior. We extend the analysis to a supply chain setting and establish coordinating contract between a loss averse retailer facing a newsvendor problem and a risk neutral supplier under recourse option. We find that the contract parameter does not depend on the loss aversion; hence, the same contract can be implemented with retailers with different levels of loss aversion. © 2017 Elsevier B.V.
About the journal
JournalData powered by TypesetEuropean Journal of Operational Research
PublisherData powered by TypesetElsevier B.V.
ISSN03772217
Open AccessNo
Concepts (16)
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    Costs
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    Decision making
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    Decision theory
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    Risk assessment
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    Risk perception
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    Sales
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    Supply chains
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    COST PARAMETERS
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    Decision makers
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    Inventory
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    LOSS AVERSION
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    Newsvendor problem
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    RATIONAL BEHAVIOR
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    RECOURSE OPTION
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    Utility functions
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    Rational functions