Risk Aversion and Implicit Shortage Cost Explain the Anchoring and Insufficient Adjustment Bias in Human Newsvendors
16 Pages Posted: 23 Jun 2014 Last revised: 21 Sep 2014
Date Written: June 21, 2014
Anchoring and Insufficient Adjustment (AIA) bias has been observed in many newsvendor experiments, although a mathematical explanation for this behavior has previously eluded researchers. We show that risk aversion coupled with an implicit shortage cost, both of which are well-known components of newsvendor decisions, comprehensively explains this behavior. We construct combinations of a risk averse utility function and a shortage cost that explain the results from Schweitzer and Cachon (2000), the first and the most-cited study in newsvendor experiments.
Keywords: Behavioral Operations, Newsvendor, Inventory
JEL Classification: M11
Suggested Citation: Suggested Citation