Research Of Behavioral Newsvendor Problem Based On Pessimistic And Optimistic Biases

How to manage inventory effectively has been being the focus of research in operation and management science and the important step in effective operation of the whole supply chain. In face of fast changing stochastic demand, how does each manufacturer decides its optimal production? how does every retailer makes its inventory decision? how do those service enterprises design their optimal op-eration space? All these problems are common obstacles encountered by various types of enterprises around the world. As the cornerstone of theory about this kinds of issues, the classic newsvendor model has been a highlight to the scholars and managers in the fields for a long time, due to its elegant structure and excel-lent ability to capture a great number of situations of businesses and manufacture operation in practice and its extensive application prospects.Over the past three decades, traditional economic and financial theories based on the expected utility have been challenged by many scholars, owing to their failure to explain some anomalies in reality. Some researchers devel-oped behavioral economics and behavioral finance by incorporating human be-ing’s behavioral biases into decision making process, which are the hottest topics in modern economics and finance. Management decision-making are very much tied to the human’s behaviors, as do economic and financial decision. Therefore, a few scholars have made attempt to draw on some tools of behavioral economics and finance to investigate operation management in recent ten years, and ad-vanced theories of behavioral operation management(BOM). Compared with the development of behavioral economics and finance, BOM is just a beginning. Fur-thermore, most of the extant works in the BOM field just consider few behavioral bias such as risk aversion, loss aversion, stock-out aversion, boundary rationality and overconfidence. A great number of empirical evidences show that human be-ing’s emotions have a significant role in their decision-making processes recently. Some researches on psychology have demonstrated that was always related to all of the human’s passive feeling, and optimism bias mingled with any positive emo-tions. Consequently, the pessimism and optimism biases will have great impact on people’s decision-making. Thus, it is obviously a valuable research subject, not only academically but also practically, to study what roles do the pessimism and optimism biases play in the newsvendor problem.Motivated by these considerations, this paper reexamines the classic newsven-dor problem from the perspective of the pessimism and optimism biases. The main work comprises three aspects as following.1. We have studied the influence of the pessimism and the optimism biases on newsvendor’s ordering decision, and draw some comparisons among these re-sults derived from the frameworks that based on the expected utility and risk neutral news vendor problem. Our main results show that optimal order quan-tities of a pessimistic anticipated utility newsvendor are always less than those of risk aversion EU newsvendor and risk neutral newsvendor, which illustrates that newsvendor’s probability-dependent attitudes toward risk will result in a greater loss in the efficiencyof the supply chain. Under some adaptive conditions, the opposite conclusion can be drawn for optimistic newsvendor. Therefore, the pessimism and the optimism biases aggravate the instability of the supply chain system. In addition, the put-to-center effect originated from Schweitzer and Ca-chon’s experiment (2000) can also be explained reasonably under AU framework by constructing a specific example. Finally, distinguished from those published literatures of comparative static analysis in newsvendor problem, we examine ef-fects of changes in the mean and variance of the stochastic demand on pessimistic and optimistic newsvendor’s decision-making behaviors.2. We have revised the newsvendor problem under the price-dependent set-ting and studied pessimistic and optimistic newsvendor’s joint pricing and order-ing decision-making under multiplication and addition demand model. In mul-tiplication demand model and some adaptive conditions, we demonstrate that an anticipated utility newsvendor’s optimal price, with pessimistic bias, is higher than that of corresponding dual utility newsvendor and risk neutral newsvendor, while optimal order quantities are less than associated those.As far as optimistic newsvendor is concerned, we can obtain opposite conclusion. When it comes to addition demand model, an anticipated utility newsvendor’s optimal price, with pessimistic bias, is lower than that of corresponding dual utility newsven-dor and risk neutral newsvendor under addition demand model, the situation is completely contradict to the optimism. Unfortunately, there do not exist unam-biguous conclusions about the relationship of order quantities among different decision making models.3. We have examined the effects of the pessimistic and optimistic bias on decision behavior of capital-constrained newsvendor. The influences of the pes-simistic and optimistic bias are investigated on decisions of newsvondor’s order-ing and borrowing loan, and on decisions of bank’s setting loan upper-limits and bank’s profits. We have proved that the equilibrium order quantities between pessimistic (optimistic) newsvendor and bank are less (more) than those when both of them are risk neutral decision makers. Furthermore, the loan upper-limits set by bank with pessimistic (optimistic) bias are less (more) than that set by risk neutral bank, as a result, the newsvendor’s bankruptcy probability, resulted from borrowing loan from bank, will be lower (higher).