Publication Type

Journal Article

Version

acceptedVersion

Publication Date

7-2019

Abstract

Problem definition: Studies have shown that the behavior of subjects in newsvendor experiments is not consistent with expected profit maximization - an assumption that is often made in operations management literature. Although prospect theory has been established as a popular model of behavioral decision making under uncertainty, it was considered to be inconsistent with observed newsvendor behavior (in particular, the pull-to-center effect) until a recent study proposed a prospect theory model that is consistent with the pull-to-center effect; however, this model's ability in representing newsvendor behavior compared to other plausible prospect theory models is unexplored in the literature. This paper takes a more comprehensive approach in building several prospect theory-based newsvendor models, and evaluates their competence in representing the observed newsvendor behavior. An important feature of these models is that they are not only consistent with the pull-to-center effect, but they can also, in accordance with the findings from recent research, accommodate individual-level heterogeneity in order quantities.

Keywords

Newsvendor problem, prospect theory, reference point, pull-to-center effect, model selection

Discipline

Operations and Supply Chain Management

Research Areas

Operations Management

Publication

Manufacturing and Service Operations Management

Volume

21

Issue

3

First Page

479

Last Page

711

ISSN

1523-4614

Identifier

10.1287/msom.2017.0701

Publisher

INFORMS

Copyright Owner and License

Authors

Additional Files
msom.2017.0701-sm.pdf (286 kB)

Additional URL

https://doi.org/10.1287/msom.2017.0701

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