Risk preferences and robust inventory decisions

Recently in inventory management instead of maximizing expected profit or minimizing expected cost risk-averse objective functions have been used for determining the optimal order quantity. We use the well-known newsvendor model to determine the optimal order quantity for an objective function with two risk parameters, which can describe risk-neutral, risk-averse as well as risk-taking behaviour of the inventory manager. This approach can also be applied to situations in which the demand distribution cannot be specified uniquely. We consider robust optimization procedures-maximin and minimax regret-to determine optimal order quantities if the set of potential demand variables can be partially ordered by stochastic dominance rules.