Prospect Theory and the Newsvendor Problem
Mahesh Nagarajan, Steven Shechter
Management Science · 2014 · Volume 60 · Issue 4
Abstract
The newsvendor problem is a fundamental decision problem in operations management. Various independent experimental studies in laboratory settings have shown similar deviations from the theoretical optimal order quantity. We clarify that Prospect Theory, a prevalent framework for decision making under uncertainty, cannot explain the consistent empirical findings. This paper was accepted by Yossi Aviv, operations management.
Keywords
Prospect Theory, newsvendor problem, risk preference
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