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Related Experiment Video

Updated: Aug 16, 2025

Measuring the Subjective Value of Risky and Ambiguous Options using Experimental Economics and Functional MRI Methods

Measuring the Subjective Value of Risky and Ambiguous Options using Experimental Economics and Functional MRI Methods

Published on: September 19, 2012

Sourcing decisions with loss aversion under yield and demand randomness.

Qingwei Wang¹, Meimei Zheng¹, Wei Weng²

¹School of Mechanical Engineering, Shanghai Jiao Tong University, Shanghai, 200240 China.

OR Spectrum : Quantitative Approaches in Management

|December 26, 2022

Summary

Retailers ordering decisions are impacted by yield, demand randomness, and loss aversion. Loss aversion with a fixed reference profit can increase order quantities compared to risk-neutral behavior.

Keywords:

Demand uncertainty Loss aversion Sourcing decision Yield risk

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Measuring the Subjective Value of Risky and Ambiguous Options using Experimental Economics and Functional MRI Methods

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Published on: June 5, 2016

Area of Science:

Operations Research
Behavioral Economics
Supply Chain Management

Background:

Yield and demand randomness are prevalent in retail supply chains.
Loss aversion is a key behavioral trait influencing decision-making.

Purpose of the Study:

To analyze retailer ordering decisions under yield and demand randomness, incorporating loss aversion.
To compare ordering strategies for risk-neutral, loss-averse (zero reference profit), and loss-averse (fixed reference profit) retailers.

Main Methods:

Mathematical modeling of retailer ordering decisions.
Comparative analysis of optimal order quantities across different decision-maker profiles.
Investigation under uniform demand distribution and prospect-dependent reference points.

Main Results:

Loss-averse retailers with zero reference profit order less than risk-neutral counterparts.
Loss-averse retailers with fixed reference profit may order more than risk-neutral ones if salvage value is high.
Order quantity is sensitive to reference profit, loss aversion degree, and supplier reliability.

Conclusions:

Loss aversion significantly alters ordering behavior compared to risk neutrality.
The nature of the reference point (fixed vs. prospect-dependent) influences ordering strategies.
Understanding these behavioral aspects is crucial for optimizing supply chain inventory management.