Dynamic Ordering With Prospect Theory In Newsvendor Model

The classical newsvendor model was developed under the assumption that decision-makers are perfect optimizers.However,in recent experimental findings,subjects in newsvendor experiments systematically deviate from the optimal critical fractile solu-tion to the mean demand.This phenomenon gives a new direction for the continued development of the newsvendor model.Recently,more scholars to study the strate-gic behavior of newsvendor model of the retailer from the perspective of risk control and behavioral economics.They point out that the retailer's decision is not affected by commodity prices and costs,but also affected by the risk preference,loss aversion and reference point.The study of the subject has the vital significance for the study of decision-making in real inventory management behavior logic.Then we modify the classical single-period problem by adding the characteristics of Prospect Theory and anchoring effect.In our study,we model an evolving decision model in which retailer evaluates his performance relative to his prior gains and losses,i.e.,a feeling of inferior revenue results in a negative impact to utility,while a feeling of superior revenue results in a positive contribution.Then we find that historical com-parison induces characteristic deviations from the newsvendor optimal order quantity,which is consistent with some anomalies highlighted by recent experimental findings.Futhermore,we report numerical studies to endorse the theoretical results herein ex-plained.