Coping with risk management and fill rate in the loss-averse newsvendor model

Xinsheng Xu, Chi Kin Chan, Andre Langevin

Research output: Journal article publicationJournal articleAcademic researchpeer-review

23 Citations (Scopus)

Abstract

In this paper, we introduce the CVaR (Conditional Value-at-Risk) measure to hedge against the risks for the loss-averse newsvendor. We derive the optimal order quantities for the loss-averse newsvendor to maximize the CVaR objective of utility with and without the shortage cost, respectively. It is shown that when shortage cost is not considered, an increase in the degree of loss aversion leads to a decrease in the fill rate. Therefore the newsvendor should strike a balance between the two conflicting targets in selecting the optimal order quantity. When the shortage cost is taken into account and sufficiently large, it is proved that an increase in the degree of loss aversion leads to an increase in the fill rate. To manage both of the two targets, the newsvendor should order more items in this case. Our sensitivity analysis further verifies that high risk implies high return and low risk comes with low return. Based on the analysis, some management insights for the risk management of the loss-averse newsvendor are presented.
Original languageEnglish
Pages (from-to)296-310
Number of pages15
JournalInternational Journal of Production Economics
Volume195
DOIs
Publication statusPublished - 1 Jan 2018

Keywords

  • Conditional value-at-risk
  • Fill rate
  • Loss aversion
  • Newsvendor model
  • Risk management

ASJC Scopus subject areas

  • Business, Management and Accounting(all)
  • Economics and Econometrics
  • Management Science and Operations Research
  • Industrial and Manufacturing Engineering

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