Entrepreneurs and Newsvendors: Do Small Businesses Follow the Newsvendor Logic when Making Inventory Decisions?

This work empirically assesses the degree to which inventory decisions made by entrepreneurs and small businesses are informed by the logic underlying the newsvendor model and influenced by the decision-maker’s risk profile. We used a web- and email-based survey, combined with a telephone follow-up to elicit risk profiles, obtaining 51 usable responses. Our findings, though tentative, suggest that entrepreneurs do follow the newsvendor logic, but more so for high-margin than for best-selling products. We find that entrepreneurs’ risk profiles are consistent with the prediction from prospect theory, displaying risk aversion for profits and risk-seeking behavior for losses. We find that risk aversion for profits tends to be associated with higher safety stocks, in contradiction to existing theory. We offer several possible explanations for this finding, which needs further research to be refuted or validated.