The Expectation-Based Loss-Averse Newsvendor

We modify the classic single-period inventory management problem by
assuming that the newsvendor is expectation-based loss averse
according to Koszegi and Rabin (2006, 2007). Expectation-based loss
aversion leads to an endogenous psychological cost of leftovers as
well as stockouts. If there are no monetary stockout costs, then
the loss-averse newsvendor orders a quantity lower than the
quantity ordered by a profit-maximizing newsvendor. If there are
positive monetary costs associated with stockouts, then the
loss-averse newsvendor places suboptimal orders, which can be
either too high or too low.