A Note on Risk-Aversion of Informed Newsvendors

The order behavior of newsvendors has been extensively analyzed in the behavioral operations literature and a robust observation is that average order quantities are between expected-profit-maximizing quantities and mean demand. This “pull-to-center” effect has been explained by anchoring, demand-chasing, inventory error minimization, and other decision heuristics and biases. Risk preferences have been ruled out as an explanation of order behavior, which we believe might have been premature. Risk preferences vary between people and understanding the effect of risk preferences on orders requires an analysis on the individual level and not only on the group level, which is the dominant approach in the literature. In a controlled laboratory experiment, we measure individual risk preferences and analyze how they relate to order quantities. We find a significant correlation between individual risk preferences and order quantities, which indicates that risk preferences affect order behavior. We also test how information about the effect of order quantities on the profit distribution affects ordering and find only a marginal moderation effect indicating that basic information are sufficient to act according to risk preferences. Furthermore, our analyzes show no mediation effect of risk preferences by gender, but a significant level effect of gender: female anchor more on mean demand.