Prospect Theory Explains Newsvendor Behavior: The Role of Reference Points

Current understanding in operations management is that prospect theory, as a theory of decision making under uncertainty, cannot systematically explain the ordering behavior observed in experiments on the newsvendor problem. We suggest this is because the newsvendor’s reference point is assumed to b...

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Bibliographic Details
Published inManagement science Vol. 61; no. 12; pp. 3009 - 3012
Main Authors Long, Xiaoyang, Nasiry, Javad
Format Journal Article
LanguageEnglish
Published Linthicum INFORMS 01.12.2015
Institute for Operations Research and the Management Sciences
Subjects
Decision making
Management research
newsvendor problem
Operations management
Payoffs
Production management
Prospect theory
reference points
Uncertainty
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Summary:Current understanding in operations management is that prospect theory, as a theory of decision making under uncertainty, cannot systematically explain the ordering behavior observed in experiments on the newsvendor problem. We suggest this is because the newsvendor’s reference point is assumed to be the status quo, i.e., zero payoff. We propose an alternative based on newsvendor’s salient payoffs and show that prospect theory can, in fact, account for experimental results. This paper was accepted by Serguei Netessine, operations management.
Bibliography:ObjectType-Article-1
SourceType-Scholarly Journals-1
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content type line 14
ISSN:0025-1909
1526-5501
DOI:10.1287/mnsc.2014.2050