Topic
Loss aversion
About: Loss aversion is a research topic. Over the lifetime, 2898 publications have been published within this topic receiving 115198 citations.
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TL;DR: The experimental results show that a pull contract achieves higher channel efficiency than that of a push contract, and the APD contract weakly Pareto dominates the push contract; retailers are better off and suppliers are no worse off under theAPD contract.
Abstract: In this paper we experimentally investigate how the allocation of inventory risk in a two-stage supply chain affects channel efficiency and profit distribution. We first evaluate two common wholesale price contracts that differ in which party incurs the risk associated with unsold inventory: a push contract in which the retailer incurs the risk and a pull contract in which the supplier incurs the risk. Our experimental results show that a pull contract achieves higher channel efficiency than that of a push contract, and that behavior systematically deviates from the standard theory in three ways: 1 stocking quantities are set too low, 2 wholesale prices are more favorable to the party stocking the inventory, and 3 some contracts are erroneously accepted or rejected. To account for these systematic regularities, we extend the existing theory and structurally estimate a number of behavioral models. The estimates suggest that a combination of loss aversion with errors organizes our data remarkably well. We apply our behavioral model to the advance purchase discount APD contract, which combines features of push and pull by allowing both parties to share the inventory risk, in a separate experiment as an out-of-sample test, and we find that it accurately predicts channel efficiency and qualitatively matches decisions. Two practical implications of our work are that 1 the push contract performs close to standard theoretical benchmarks, which implies that it is robust to behavioral biases, and 2 the APD contract weakly Pareto dominates the push contract; retailers are better off and suppliers are no worse off under the APD contract.
Data, as supplemental material, are available at http://dx.doi.org/10.1287/mnsc.2014.1940 .
This paper was accepted by Serguei Netessine, operations management.
83 citations
TL;DR: In this article, the authors study how a retailer can design an advance selling strategy to maximize its own profits and find that there exist two thresholds for the selling season profit margin and consumer's expected valuation.
Abstract: Advance selling through pre-orders is a strategy to transfer inventory risk from a retailer to consumers. A newsvendor retailer can have three strategies to choose from: no advance selling allowed (NAS), moderate advance selling with a moderate discount for pre-orders (MAS), and deep advance selling with a deep discount for pre-orders (DAS). This research studies how a retailer could design an advance selling strategy to maximize her own profits. We find some interesting results. For example, there exist two thresholds for the selling season profit margin and two thresholds for consumer's expected valuation. For products with higher profit margin than the high threshold on profit margin, a retailer should always use DAS. For products with medium profit margin within the two thresholds, a retailer should adopt MAS if consumer's expected valuation is lower than the high threshold and use DAS otherwise. For products with lower profit margin than the low threshold, a retailer should use NAS, DAS, or MAS, respectively, if consumer's expected valuation is lower than the low threshold, higher than the high threshold, or between the two thresholds, respectively. Through sensitivity analyses, we also show the effects of multiple consumer characteristics on a retailer's optimal advance selling strategy.
82 citations
TL;DR: In two experiments, it was found that utility under risk and utility over time differed and were uncorrelated, suggesting that loss aversion, although important in both decision contexts, is volatile and subject to framing.
Abstract: The nature of utility is controversial. Whereas decision theory commonly assumes that utility is context specific, applied and empirical decision analysis typically assumes one unifying concept of utility applicable to all decision problems. This controversy has hardly been addressed empirically because of the absence of methods to measure utility outside the context of risk. We introduce a method to measure utility over time and compare utility under risk and utility over time. We distinguish between gains and losses and also measure loss aversion. In two experiments we found that utility under risk and utility over time differed and were uncorrelated. Utility under risk was more curved than utility over time. Subjects were loss averse both for risk and for time, but loss aversion was more pronounced for risk. Loss aversion over risk and time were uncorrelated. This suggests that loss aversion, although important in both decision contexts, is volatile and subject to framing.
82 citations
TL;DR: In this paper, the authors design an experiment to compare individuals' decisions across three resource allocation contests which are isomorphic under risk-neutrality, and find that in aggregate the single-prize contest generates lower expenditures than either the proportional priors or the multi-pripriors.
82 citations
TL;DR: There is growing interest in the use of loss contracts that offer performance incentives as up-front payments that employees can lose as mentioned in this paper, and there is also some work on behavioral models that predict a trade-off in using loss contracts.
Abstract: There is growing interest in the use of loss contracts that offer performance incentives as up-front payments that employees can lose. Standard behavioral models predict a trade-off in the use of l...
81 citations