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

See all articles by Srinagesh Gavirneni

Srinagesh Gavirneni

Cornell University - Samuel Curtis Johnson Graduate School of Management

Lawrence W. Robinson

Cornell University - Samuel Curtis Johnson Graduate School of Management

Date Written: June 21, 2014

Abstract

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

Gavirneni, Srinagesh and Robinson, Lawrence W., Risk Aversion and Implicit Shortage Cost Explain the Anchoring and Insufficient Adjustment Bias in Human Newsvendors (June 21, 2014). Available at SSRN: https://ssrn.com/abstract=2457455 or http://dx.doi.org/10.2139/ssrn.2457455

Srinagesh Gavirneni (Contact Author)

Cornell University - Samuel Curtis Johnson Graduate School of Management ( email )

Ithaca, NY 14853
United States

Lawrence W. Robinson

Cornell University - Samuel Curtis Johnson Graduate School of Management ( email )

Ithaca, NY 14853
United States

Here is the Coronavirus
related research on SSRN

Paper statistics

Downloads
82
Abstract Views
579
rank
330,685
PlumX Metrics