Behavioral inventory decisions: The newsvendor and other inventory settings

We summarize the literature on human decision-making in the newsvendor model. In the newsvendor model, a decision maker faces stochastic demand and must determine the order quantity. Consistent findings in the literature are that people choose order quantities that are between expected-profit-maximizing quantities and mean demand and that they vary over time. We discuss how deviations of people’s orders from the expected-profit-maximizing quantities can be explained by decision biases and alternative utility functions. We also discuss how heterogeneity among people can explain between-subject variety, present alternative behavioral models, and identify potential areas for future research.