The expectation-based loss-averse newsvendor

Abstract

Based on the traditional newsvendor model, we modify the classic single-period problem by assuming that the newsvendor is expectation-based loss averse. We highlight the influence of psychological reference point and loss aversion and find that if shortage cost is negligible, then a loss-averse newsvendor may order less than a risk-neutral newsvendor. We also find that if shortage cost is considered, the loss-averse newsvendor's optimal order quantity has something to do with the relation of the marginal overage loss and marginal underage loss, which can never occur in the risk-neutral newsvendor model.