Simulating Profit Loss in Behavioral Newsvendor Problems

摘要

The newsvendor problem is one of the classic models in inventory management. Although the optimal order quantity can be calculated, experiments reveal that decision makers often do not select the optimal quantity. These decision biases have been well studied, but analysis of the financial risk associated with these suboptimal decisions is limited. This paper examines the impact on profit by comparing the expected profit of suboptimal decisions with that of optimal decisions. We first conduct a literature review of behavioral results in the newsvendor setting. We use the results reported in the literature to determine parameters in a model for behavioral newsvendor decision making. We then build a Monte Carlo simulation that incorporates the behavioral decision making model, heterogeneity of decision makers, and parameters of the newsvendor decision to calculate the expected profit loss. The simulation results shed light on the financial risk associated with these inventory decisions.