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Revisiting prospect theory and the newsvendor problem. (English) Zbl 1409.90024
Summary: 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: prospect theory with a decision-independent reference point can predict the pull-to-center effect for the newsvendor problem with a general distribution of demand.

MSC:
90B05 Inventory, storage, reservoirs
90B50 Management decision making, including multiple objectives
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