Abstract: Newsvendor problem is a basic problem in the stochastic inventory theory, and has been widely studied and used in operations management. The classical newsvendor problem is based on the assumption that the newsvendor is risk-neutral, which means the newsvendor will choose an order quantity that can maximize his expected profit. However, the empirical results show that the actual order quantity often deviates from the optimal order quantity of the classical newsvendor problem. Moreover, most empirical results also show that the newsvendor tends to order less goods than the classical newsvendor problem. To explain this phenomenon, the paper intends to study the newsvendor problem using the Koszegi and Rabin's reference-dependent preference theory. Koszegi and Rabin thought that the reference point is often determined by the decision-maker's rational expectation. In the paper, the newsvendor's rational expectation is used as his reference point. Thus, the newsvendor's reference point is changed from a constant to a random variable, which is more in line with decision maker's decision behavior. The research results show that optimal order quantity of the newsvendor problem based on expectation does exit and is unique. The optimal order quantity is not only related with the probability distribution of goods, sales price, the salvage and other factors, but also related to the degree of the newsvendor's loss aversion. The order quantity of newsvendor based on expectation will increase as the sales price or the salvage increases, but will decrease as the acquisition cost increases. Specially, if the newsvendor is loss aversive, order quantity of newsvendor is less than the order quantity of classical newsvendor problem; conversely, order quantity of newsvendor is greater than the order quantity of classical newsvendor problem. The conclusion is consistent with the most empirical results. New insights into the newsvendor problem are offered by using the newsvendor's rational expectation as his reference point. The research on newsvendor problem can also be carried out in the following aspects. On one hand, it is worthwhile to choose other reference points and discuss the newsvendor problem with these reference points. On other hand, it is clearly that the newsvendor is closely related to decision theory. In recent decades, with the new decision theory especially the risk decision theory emerging, it is a meaningful work to study the newsvendor problem with the new decision theory. In the end, an example is given to illustrate the correctness of the conclusions.

Key words: loss aversion, newsvendor problem, reference-dependent preference, decision making