A note on the risk aversion of informed newsvendors

Michael Becker-Peth, Ulrich W. Thonemann and Torsten Gully

Journal of the Operational Research Society, 2018, vol. 69, issue 7, 1135-1145

Abstract: The order behaviour of newsvendors has been extensively analysed in the behavioural operations literature and a robust observation has been that average order quantities are between expected-profit-maximising quantities and mean demand. This “pull-to-center” effect has been explained by anchoring, demand-chasing, inventory error minimisation, and other decision heuristics and biases. Risk preferences have been ruled out as an explanation of order behaviour, which we believe might have been premature. Risk preferences vary between people and understanding the effect of risk preferences on ordering requires an analysis at the individual level and not only on the group level, which is the dominant approach used in the literature. In a controlled laboratory experiment, we measure individual risk preferences and analyse how they relate to order quantities. We find a significant correlation between individual risk preferences and order quantities, which indicates that risk preferences affect order behaviour. We also test how information about the effect of order quantities on the profit distribution affects ordering and find only a marginal moderation effect. Furthermore, our analyses show no mediation effect of risk preferences by gender, but a significant level effect of gender: female subjects anchor more on mean demand than male subjects.

Date: 2018
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Citations: View citations in EconPapers (6)

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DOI: 10.1080/01605682.2017.1390525

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