Prospect Theory Explains Newsvendor Behavior: The Role of Reference Points

Impact of Reference Point on Lose-Averse Newsvendor Problem

Newsvendor problem is a fundamental singleitem inventory problem with stochastic demands over a single period. In the traditional newsvendor model, the expected utility theory is introduced to measure the risk attitude of decision-maker. However, behavior of decisionmaker for many practical problems cannot be explained with the expected utility theory. As a result, prospect theory of the behavi...

Revisiting prospect theory and the newsvendor problem

Many experimental studies have demonstrated that human decision-makers exhibit the pull-to-center effect in newsvendor decision. It has been shown in the literature that prospect theory with a decision-dependent reference point can predict the pull-to-center effect for the newsvendor problem by assuming a uniform distribution of demand. In this paper, we prove this result for a general case: pr...

Newsvendor Models with Alternative Risk Preferences within Expected Utility Theory and Prospect Theory Frameworks

Newsvendor models are widely used in the literature, and usually based upon the assumption of risk neutrality. Recently there is a growing body of literature that attempts to use alternative risk preferences rather than risk neutrality to describe the newsvendor decision-making behavior. In this chapter, we provide an overview of newsvendor models with alternative risk preferences within the ex...

Modeling Newsvendor Behavior: A Prospect Theory Approach

An extended hesitant group decision-making technique based on the prospect theory for emergency situations

Throughout the present manuscript, we are going to introduce a novel group emergency decision-making technique in which the application of prospect theory explains the psychological behaviour of the decision maker who is affected by the hesitancy and uncertainty of cognition in decision making problems.\Instead of usual aggregation procedure, we implement here a new fusion technique that ...