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On lot-sizing problem in a random yield production system under loss aversion

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  • Xiang Li

    (Nankai University)

  • Yongjian Li

    (Nankai University)

Abstract

Based on the framework of prospect theory, this paper studies the optimization problem for a random yield production system under loss aversion preference. The objective is to determine production quantity to maximize the expected utility considering loss aversion. We formulate the problem under the scenarios of multiplicative and additive random yield risks, respectively, and prove the uniqueness of the optimal production quantity under each scenario. This optimal production quantity is compared with the one in risk-neutral case, and its relationship on the loss-aversion degree is analyzed. We also explore the sensitivities of the production quantity to the system parameters. It is shown that the optimal production quantity is increasing with shortage penalty and decreasing with holding cost, whereas the sensitivities to market price and production costs are conditional.

Suggested Citation

  • Xiang Li & Yongjian Li, 2016. "On lot-sizing problem in a random yield production system under loss aversion," Annals of Operations Research, Springer, vol. 240(2), pages 415-434, May.
    • Handle: RePEc:spr:annopr:v:240:y:2016:i:2:d:10.1007_s10479-014-1715-2
    DOI: 10.1007/s10479-014-1715-2
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    References listed on IDEAS

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    6. Jiarong Luo & Xu Chen & Chong Wang & Gaoxun Zhang, 2021. "Bidirectional options in random yield supply chains with demand and spot price uncertainty," Annals of Operations Research, Springer, vol. 302(1), pages 211-230, July.

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