The newsvendor problem with reference dependence, disappointment aversion and elation seeking

We study the newsvendor problem considering newsvendor's three psychological behaviors: reference dependence, disappointment aversion and elation seeking, and investigate the impact of the three psychological behaviors on newsvendor's optimal policy. We first analyze the characteristics and relation of three behaviors, and give the newsvendor's utility function which is consisted of the economic payoff (i.e., profit) and psychological satisfaction (i.e., behavioral utility). Then, we introduce the three behaviors into the newsvendor model, and re-construct the newsvendor model considering the effects of the three behaviors. Furthermore, we prove that the uniquely optimal solution exists and give the optimal solutions for several situations of the behavioral parameters' values. Finally, we provide the numerical study to show how the three psychological behaviors affect the optimal solution. The research result shows that the order quantity increases with elation seeking parameter, but decreases with reference dependence parameter and disappointment aversion parameter. It also shows that the newsvendor who exhibits reference dependence, disappointment aversion and elation seeking should consider the respective and interactive effects of three psychological behaviors in decision-making.