A risk averse newsvendor is one who orders optimal quantity -i.e., at a point where the total of shortage and overage cost is minimized for a given length of period being analyzed. However, there are complexities in this definition, that must be understood. A unit short is not the same thing as a unit extra since the associated costs are different. I think, risk - averse is a term limited in its implications in the context of Newsvendor. In general, a risk-averse vendor is defined as one who does not permit shortages/stock-out. Well, if the demand is normally distributed over the period, then we are talking about ordering an infinite quantity since the tails extend into infinity. personally, I would define risk-averse newsvendor as one where marginal shortage and holding cost equal each other. For discrete products where increments are in units of one, there is no such point in real world.

Ashok

A good source to start with is certainly Schweitzer and Cachon (2000) who discuss several utitliy functions (preferences) such as risk aversion of newsvendors. The key is to define the utility function appropriately and then to optimize expected utility instead of expected profits.

Thanks Guido. I got it now. In utility terms the pain of loss has been demonstrated to be greater than the joy from a gain. So, in utility terms, the ordering is at a point where the pain would equal the joy and this would obviously be below the optimal.