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

See all articles by Xiaoyang Long

Xiaoyang Long

University of Wisconsin - Madison - School of Business

Javad Nasiry

McGill University

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

Suggested Citation

Long, Xiaoyang and Nasiry, Javad, Prospect Theory Explains Newsvendor Behavior: The Role of Reference Points (November 11, 2014). Xiaoyang Long, Javad Nasiry (2015) Prospect Theory Explains Newsvendor Behavior: The Role of Reference Points. Management Science 61(12):3009-3012., Available at SSRN: https://ssrn.com/abstract=3970374

Xiaoyang Long (Contact Author)

University of Wisconsin - Madison - School of Business ( email )

Madison, WI
United States

Javad Nasiry

McGill University ( email )

1001 Sherbrooke St. West
Montreal
Canada

HOME PAGE: http://https://www.mcgill.ca/desautels/javad-nasiry

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