The newsvendor problem: The role of prospect theory and feedback

Surti, Chirag; Celani, Anthony; Gajpal, Yuvraj

doi:10.1016/j.ejor.2020.05.013

Cited by 21 publications

(6 citation statements)

References 28 publications

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“…These explanations include the possible inability to process information or feedback (Benzion, Cohen, Peled, & Shavit, ; Benzion, Cohen, & Shavit, ; Diehl & Sterman, ; Ding, Puterman, & Bisi, ; Perakis & Roels, ; Wang & Webster, ); national differences, cultural differences, gender differences, or differences in cognitive aptitude (Cui, Chen, Chen, Gavirneni, & Wang, ; De Vericourt, Jain, Bearden, & Filipowicz, ; Feng, Keller, & Zheng, ; Hoppe & Kusterer, ; Moritz, Hill, & Donohue, ); poor or limited cognition as a result of faulty reference frame or framing of information or anchoring on information (Herweg, ; Köszegi & Rabin, ; Nagarajan & Shechter, ; Schweitzer & Cachon, ); or bounded rationality (Kremer, Minner, & Van Wassenhove, ; Su, ). Recent work on the subject by Long and Nasiry () and Surti and Celani () shows that students, acting as newsvendors, display behavior consistent with Prospect Theory proposed by Kahneman and Tversky () and together with Schweitzer and Cachon () provides an improved understanding of how the newsvendor makes decisions.…”

Section: Introductionmentioning

confidence: 77%

“…Our work is largely motivated by insights derived from the findings in Schweitzer and Cachon (); Bolton and Katok (); Bolton, Ockenfels, and Thonemann (); Long and Nasiry (); and Surti and Celani (). However, our contribution is to provide the instructor with an active learning activity that can be implemented prior to teaching lessons in forecasting and/or inventory management for both undergraduate and graduate students.…”

Section: Introductionmentioning

confidence: 99%

“…When translated into a newsvendor context (Surti & Celani, ), this means that when (p − c ) > ( c − h ) or C u > C o , the newsvendor's actual order quantity or observed decision ( q a ) is less than the optimal ( q a < q * ). The newsvendor experiences a gain‐frame in terms of higher margins and acts in a risk‐averse manner by ordering less than the optimal quantity.…”

Section: Introductionmentioning

confidence: 99%

See 2 more Smart Citations

Newsvendor Game: A Behavioral Exercise in Decision Making under Risk

Surti

Celani

2019

Decision Sci J Innov Edu

Self Cite

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The newsvendor problem is a classic problem of decision making under risk that is taught in traditional Operations and Supply Chain Management classes as a single‐period inventory problem. We discuss the following three pedagogical points of interest to any instructor tasked with teaching this topic: a) why the newsvendor model is relevant in this day and age; b) how to make better sense of the newsvendor problem for students; and c) how to easily implement and administer an active learning exercise in either a traditional classroom, or an online setting. This active learning exercise is a quick, effective, and meaningful way of demonstrating a variety of concepts related to the newsvendor problem that include: a) the rational economic method of calculating optimal order quantity, b) the inherent risk in forecasting and ordering decisions as they relate to surpluses and shortages; and c) the cognitive limitations in decision making that often result in irrational but predictable decision‐making behavior as demonstrated by empirical research on newsvendor behavior. This exercise can help instructors and students transition into broader discussions on human behavior, cognitive limitations, and perceptions of risk. Overall, it should provide the student with an improved understanding of the operational and behavioral issues associated with decision making under risk.

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Section: Introductionmentioning

confidence: 77%

Section: Introductionmentioning

confidence: 99%

Section: Introductionmentioning

confidence: 99%

See 1 more Smart Citation

Newsvendor Game: A Behavioral Exercise in Decision Making under Risk

Surti

Celani

2019

Decision Sci J Innov Edu

Self Cite

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“…In the emerging line of research referred to as behavioral newsvendor, the strategic customers are included in the demand analysis-those market-savvy customers who, aware of seasonal trends or marketing schemes, may postpone their purchase until observing a lower price, or may expedite it to exploit the initial low-price demand-boosting distributions. This implies the necessity of including the customers' biases (anchoring) toward past prices in the supply channel's optimization problem [19][20][21]. We argue that including the customers' cognitive biases in the supply channel revenue optimization problem necessitates the inclusion of their memory of the past prices.…”

Section: Memory-based Uncertain Demandmentioning

confidence: 97%

“…Inserting the general expression for the demand in ( 7) into (19) and using (20), we can prove the following proposition where F denotes the cumulative distribution of .…”

Section: The Basic Model: the Game In Single-periodmentioning

confidence: 99%

Construction of Equilibria in Strategic Stackelberg Games in Multi-Period Supply Chain Contracts

Gholami

Sandal

Ubøe

2022

Games

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Almost every supplier faces uncertain and time-varying demand. E-commerce and online shopping have given suppliers unprecedented access to data on customers’ behavior, which sheds light on demand uncertainty. The main purpose of this research project is to provide an analytic tool for decentralized supply channel members to devise optimal long-term (multi-period) supply, pricing, and timing strategies while catering to stochastic demand in a diverse set of market scenarios. Despite its ubiquity in potential applications, the time-dependent channel optimization problem in its general form has received limited attention in the literature due to its complexity and the highly nested structure of its ensuing equilibrium problems. However, there are many scenarios where a single-period channel optimization solution may turn out to be myopic as it does not consider the after-effects of current pricing on future demand. To remedy this typical shortcoming, using general memory functions, we include the strategic customers’ cognitive bias toward pricing history in the supply channel equilibrium problem. In the form of two constructive theorems, we provide explicit solution algorithms for the ensuing Nash–Stackelberg equilibrium problems. In particular, we prove that our recursive solution algorithm can find equilibria in the multi-periodic variation of many standard supply channel contracts such as wholesale, buyback, and revenue-sharing contracts.

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Coordinating a Behavioral Supply Chain Under Revenue-Sharing Contract

Mohd Mujahid Khan,

Vipin

2024

International Series in Operations Research &Amp; Management Science

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The newsvendor problem: The role of prospect theory and feedback

Cited by 21 publications

References 28 publications

Newsvendor Game: A Behavioral Exercise in Decision Making under Risk

Newsvendor Game: A Behavioral Exercise in Decision Making under Risk

Construction of Equilibria in Strategic Stackelberg Games in Multi-Period Supply Chain Contracts

Coordinating a Behavioral Supply Chain Under Revenue-Sharing Contract

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