Workshop’s Topic: In this talk, we demonstrate that dual expected utility theory, as proposed by Yaari (1987) adequately explains the newsvendor model. Through empirical studies, we compare the performance of three theories: cumulative prospect theory, expected utility theory, and dual expected utility theory. Our findings reveal that the dual expected utility mode outperforms the other two. Notably, cumulative prospect theory degenerates into dual expected utility theory, indicating a linear valuation of outcomes. Building on these empirical insights, we establish the theoretical foundations for the newsvendor model under dual expected utility theory and introduce the framework of distortion risk measures. This framework includes many established results and explains phenomena such as the pull-to-center effect observed in the literature. We derive closed-form solutions for the optimal order quantity using distortion risk measures, generalizing results like the CVaR-based newsvendor model. We also propose an axiomatic framework for DRM-bivariate utility, providing a comprehensive risk-value analysis. The paper includes numerical illustrations and examples to enhance practical understanding.

Time and Location: 14:15 PM (GMT+8), Room B310 (School of Management)

Language: Bilingual (Chinese and English)