Abstract
Anchoring and Insufficient Adjustment (AIA) bias has been observed in many newsvendor experiments, although a mathematical explanation for this behavior has previously eluded researchers. We show that risk aversion coupled with an implicit shortage cost, both of which are well-known components of newsvendor decisions, comprehensively explains this behavior. We construct combinations of a risk averse utility function and a shortage cost that explain the results from Schweitzer and Cachon (2000), the first and the most-cited study in newsvendor experiments.
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