Prospect Theory Explains Newsvendor Behavior: The Role of Reference Points
Xiaoyang Long, Javad Nasiry (2015) Prospect Theory Explains Newsvendor Behavior: The Role of Reference Points. Management Science 61(12):3009-3012.
8 Pages Posted: 24 Nov 2021
Date Written: November 11, 2014
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.
Keywords: Prospect Theory, reference points, newsvendor problem
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