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Discrete Dynamics in Nature and Society
Volume 2015, Article ID 851586, 11 pages
http://dx.doi.org/10.1155/2015/851586
Research Article

Coping with Loss Aversion in the Newsvendor Model

Department of Mathematics, Binzhou University, Binzhou 256603, China

Received 31 October 2014; Accepted 12 April 2015

Academic Editor: Juan R. Torregrosa

Copyright © 2015 Jianwu Sun and Xinsheng Xu. This is an open access article distributed under the Creative Commons Attribution License, which permits unrestricted use, distribution, and reproduction in any medium, provided the original work is properly cited.

Abstract

We introduce loss aversion into the decision framework of the newsvendor model. By introducing the loss aversion coefficient , we propose a novel utility function for the loss-averse newsvendor. First, we obtain the optimal order quantity to maximize the expected utility for the loss-averse newsvendor who is risk-neutral. It is found that this optimal order quantity is smaller than the expected profit maximization order quantity in the classical newsvendor model, which may help to explain the decision bias in the classical newsvendor model. Then, to reduce the risk which originates from the fluctuation in the market demand, we achieve the optimal order quantity to maximize CVaR about utility for the loss-averse newsvendor who is risk-averse. We find that this optimal order quantity is smaller than the optimal order quantity to maximize the expected utility above and is decreasing in the confidence level . Further, it is proved that the expected utility under this optimal order quantity is decreasing in the confidence level , which verifies that low risk implies low return. Finally, a numerical example is given to illustrate the obtained results and some management insights are suggested for the loss-averse newsvendor model.