Prospect Theory Explains Newsvendor Behavior: The Role of Reference Points

Xiaoyang Long () and Javad Nasiry ()
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Xiaoyang Long: School of Business and Management, Hong Kong University of Science and Technology, Clear Water Bay, Kowloon, Hong Kong
Javad Nasiry: School of Business and Management, Hong Kong University of Science and Technology, Clear Water Bay, Kowloon, Hong Kong

Management Science, 2015, vol. 61, issue 12, 3009-3012

Abstract: 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.

Keywords: prospect theory; reference points; newsvendor problem (search for similar items in EconPapers)
Date: 2015
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Citations: View citations in EconPapers (33)

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