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Describing decision bias in the newsvendor problem: A prospect theory model

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  • Vipin, B.
  • Amit, R.K.

Abstract

In the newsvendor setting, we consider a prospect theory model with a stochastic-subjective reference point. The reference point is based on the pay-offs corresponding to the extreme values of demand; and, is influenced by the perception of costs associated with understocking and overstocking, and the pessimism level of the decision maker. Our prospect theory model describes the recent observations in the newsvendor experiments—the non-linear ordering behavior with respect to the profit margin and behavior at the extreme profit margins, in addition to the pull-to-center effect and asymmetry in ordering.

Suggested Citation

  • Vipin, B. & Amit, R.K., 2019. "Describing decision bias in the newsvendor problem: A prospect theory model," Omega, Elsevier, vol. 82(C), pages 132-141.
    • Handle: RePEc:eee:jomega:v:82:y:2019:i:c:p:132-141
    DOI: 10.1016/j.omega.2017.12.008
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    3. Liu, Hui-hui & Song, Yao-yao & Liu, Xiao-xiao & Yang, Guo-liang, 2020. "Aggregating the DEA prospect cross-efficiency with an application to state key laboratories in China," Socio-Economic Planning Sciences, Elsevier, vol. 71(C).
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    7. Chen, Xin & Xu, Weijun & Wu, Meng, 2024. "Newsvendor overconfidence and advertising," Omega, Elsevier, vol. 126(C).
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    9. Samuel N. Kirshner & Zhaolin Li, 2022. "Supply chain contracting with competing regretful retailers," Managerial and Decision Economics, John Wiley & Sons, Ltd., vol. 43(6), pages 2196-2211, September.
    10. Lei Chen & Ying-Ming Wang & Yan Huang, 2020. "Cross-efficiency aggregation method based on prospect consensus process," Annals of Operations Research, Springer, vol. 288(1), pages 115-135, May.

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