Coping with Loss Aversion in the Newsvendor Model

We introduce loss aversion into the decision framework of the newsvendor model. By introducing the loss aversion coefficient λ, we propose a novel utility function for the loss-averse newsvendor. First, we obtain the optimal order quantity to maximize the expected utility for the loss-averse newsven...

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Main Authors: Jianwu Sun, Xinsheng Xu
Format: Article
Language:English
Published: Wiley 2015-01-01
Series:Discrete Dynamics in Nature and Society
Online Access:http://dx.doi.org/10.1155/2015/851586
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author Jianwu Sun
Xinsheng Xu
author_facet Jianwu Sun
Xinsheng Xu
author_sort Jianwu Sun
collection DOAJ
description We introduce loss aversion into the decision framework of the newsvendor model. By introducing the loss aversion coefficient λ, we propose a novel utility function for the loss-averse newsvendor. First, we obtain the optimal order quantity to maximize the expected utility for the loss-averse newsvendor who is risk-neutral. It is found that this optimal order quantity is smaller than the expected profit maximization order quantity in the classical newsvendor model, which may help to explain the decision bias in the classical newsvendor model. Then, to reduce the risk which originates from the fluctuation in the market demand, we achieve the optimal order quantity to maximize CVaR about utility for the loss-averse newsvendor who is risk-averse. We find that this optimal order quantity is smaller than the optimal order quantity to maximize the expected utility above and is decreasing in the confidence level α. Further, it is proved that the expected utility under this optimal order quantity is decreasing in the confidence level α, which verifies that low risk implies low return. Finally, a numerical example is given to illustrate the obtained results and some management insights are suggested for the loss-averse newsvendor model.
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institution Kabale University
issn 1026-0226
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publishDate 2015-01-01
publisher Wiley
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spelling doaj-art-60a710afc2e14e34af9202d5116138522025-02-03T01:12:19ZengWileyDiscrete Dynamics in Nature and Society1026-02261607-887X2015-01-01201510.1155/2015/851586851586Coping with Loss Aversion in the Newsvendor ModelJianwu Sun0Xinsheng Xu1Department of Mathematics, Binzhou University, Binzhou 256603, ChinaDepartment of Mathematics, Binzhou University, Binzhou 256603, ChinaWe introduce loss aversion into the decision framework of the newsvendor model. By introducing the loss aversion coefficient λ, we propose a novel utility function for the loss-averse newsvendor. First, we obtain the optimal order quantity to maximize the expected utility for the loss-averse newsvendor who is risk-neutral. It is found that this optimal order quantity is smaller than the expected profit maximization order quantity in the classical newsvendor model, which may help to explain the decision bias in the classical newsvendor model. Then, to reduce the risk which originates from the fluctuation in the market demand, we achieve the optimal order quantity to maximize CVaR about utility for the loss-averse newsvendor who is risk-averse. We find that this optimal order quantity is smaller than the optimal order quantity to maximize the expected utility above and is decreasing in the confidence level α. Further, it is proved that the expected utility under this optimal order quantity is decreasing in the confidence level α, which verifies that low risk implies low return. Finally, a numerical example is given to illustrate the obtained results and some management insights are suggested for the loss-averse newsvendor model.http://dx.doi.org/10.1155/2015/851586
spellingShingle Jianwu Sun
Xinsheng Xu
Coping with Loss Aversion in the Newsvendor Model
Discrete Dynamics in Nature and Society
title Coping with Loss Aversion in the Newsvendor Model
title_full Coping with Loss Aversion in the Newsvendor Model
title_fullStr Coping with Loss Aversion in the Newsvendor Model
title_full_unstemmed Coping with Loss Aversion in the Newsvendor Model
title_short Coping with Loss Aversion in the Newsvendor Model
title_sort coping with loss aversion in the newsvendor model
url http://dx.doi.org/10.1155/2015/851586
work_keys_str_mv AT jianwusun copingwithlossaversioninthenewsvendormodel
AT xinshengxu copingwithlossaversioninthenewsvendormodel