Hedging Risks in the Loss-Averse Newsvendor Problem with Backlogging

Xiaoqing Liu, Felix T. S. Chan and Xinsheng Xu
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Xiaoqing Liu: College of Economics and Management, Qingdao University of Science and Technology, Qingdao 266061, China
Felix T. S. Chan: Department of Industrial and Systems Engineering, The Hong Kong Polytechnic University, Kowloon 999077, Hong Kong, China
Xinsheng Xu: College of Science, Binzhou University, Binzhou 266061, China

Mathematics, 2019, vol. 7, issue 5, 1-23

Abstract: This paper studies the optimal order decisions for the loss-averse newsvendor problem with backordering and contributes to the risk hedging issue in the newsvendor model. The Conditional Value-at-Risk (CVaR) measure is applied to quantify the potential risks for the loss-averse newsvendor in a backordering setting, and we obtain the optimal order quantity for a loss-averse newsvendor to maximize the CVaR of utility. It is found that the optimal order quantity to maximize the CVaR objective could be bigger or smaller than the expected profit maximization (EPM) order quantity, which provides an alternative explanation on decision bias in the newsvendor model. This study also reveals that the optimal order quantity for a loss-averse newsvendor to maximize expected utility with backordering is smaller than the EPM order quantity, which implies that backordering encourages the loss-averse newsvendor to order fewer items. Sensitivity analyses are performed to investigate the properties of the optimal order quantities and managerial insights are suggested. This paper provides a novel method for the risk management of the loss-averse newsvendor model and presents several new ordering policies for the retailers in practice.

Keywords: newsvendor model; conditional value-at-risk; risk management; loss aversion; backordering (search for similar items in EconPapers)
JEL-codes: C (search for similar items in EconPapers)
Date: 2019
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (1)

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