This paper considers a stationary model of inventory management in a rich setting in which unsold units carry over, in contrast with the full depreciation of unsold units that is implemented in laboratory studies of the news vendor problem. The model permits an array of costs associated with restocking, understocking, depreciation, financing, and holding inventories. The extra dimensions make it possible to hold the optimal inventory constant, while adjusting parameters that change the frequency of stockouts and the risks associated with storage and depreciation. This framework facilitates an investigation of factors that influence the nature and severity of behavioral biases observed in simpler news vendor settings. Optimal inventory decisions are derived and tested with a laboratory experiment. We consider four main questions in the inventory literature: the “pull-to-center” effect, the “recency” effect, the effect of increased up-front costs, and the effect of risk aversion.
