George Wu
John P. and Lillian A. Gould Professor of Behavioral Science

Abstracts of Publications


The two versions of prospect theory, original prospect theory (OPT; Kahneman and Tversky, 1979) and cumulative prospect theory (CPT;Tversky and Kahneman, 1992), use different composition rules to combine the value function and the probability weighting function and hence value gambles with two or more non-zero outcomes differently. Previous tests of OPT and CPT have yielded mixed results, with some investigations supporting OPT and some supporting CPT. We extend the probability tradeoff consistency axiom used in Abdellaoui (2002) for CPT to OPT, and develop a critical test of the two prospect theories based on their respective probability tradeoff consistency conditions. An empirical investigation of the critical test shows that choices are consistent with OPT, but not CPT, for gambles that do not involve a certainty effect, and consistent with both CPT and OPT for gambles that do involve a certainty effect, provided that an editing operation is invoked for OPT.

Narasimhan, Chakravarthi, Chuan He, Eric Anderson, Lyle Brenner, Preyas Desai, Dmitri Kuksov, Paul Messinger, Sridhar Moorthy, Joseph Nunes, Yuval Rottenstreich, Rick Staelin, George Wu, and Z. John Zhang (2005). "Incorporating Behavioral Anomalies in Strategic Models", Marketing Letters, 16, 361-373.

Behavioral decision researchers have documented number of anomalies that seem to run counter to established theories of consumer behavior from microeconomics that are often at the core of analytical models in marketing. A natural question therefore is how equilibrium behavior and strategies would change if models were to incorporate these anomalies in a consistent way. In this paper we identify several important and generalizable anomalies that modelers may want to incorporate in their models. We briefly discuss each phenomenon, identify a key unresolved issue and outline a research agenda to be pursued.

Wu, George, Chip Heath and Marc Knez (2003).  "A timidity error in evaluations: Evaluators judge others to be too risk averse", Organizational Behavior and Human Decision Processes 90, 50-62.

Heath, Chip, Richard P. Larrick, and George Wu (1999). "Goals as Reference Points", Cognitive Psychology 38, 79-109.

We argue that goals serve as reference points and alter outcomes in a manner consistent with the value function of Prospect Theory (Kahneman & Tversky, 1979; Tversky & Kahneman, 1992). We present new evidence that goals inherit the properties of the value function-not only a reference point, but also loss aversion and diminishing sensitivity. We also use the value function to explain previous empirical results in the goal literature on affect, effort, persistence, and performance.

Wu, George and Richard Gonzalez (1998). "Common Consequence Effects in Decision Making under Risk", Journal of Risk and Uncertainty 16, 115-139.

Unpublished Papers and Manuscripts

Li, Ye, Cade Massey, and George Wu (2014). "Learning to Detect Change"

Across a wide range of personal and professional domains, people need to accurately detect whether their environment has changed. Previous research has documented a systematic pattern of over- and under-reaction to signals of change due to system neglect, or the tendency to overweight signals and underweight the system producing the signals. We investigate whether and when experience improves the ability to detect change and reduces system neglect. We find that although the system-neglect pattern is not completely attenuated by experience, average performance did improve with experience. However, the degree of learning varied substantially across the range of decision environments we investigated: Participants showed substantial improvement in environments that provide less fickle feedback (i.e., less likely to produce false alarms) and that have lower entropy (i.e., have more information value). These characteristics of the decision environment explain a significant portion of the variance in learning between conditions and have implications for understanding learning in other dynamic tasks.

Wu, George, Chip Heath, and Richard Larrick (2004). "A prospect theory model of goal behavior"

Goals have a powerful effect on performance: higher goals typically produce better performance. Previous research has proposed three key mechanisms to explain these results: effort, persistence, and attention. We present a formal model that relates these mechanisms to a single underlying process. Our model assumes that goals divide performance into two regions, gains and losses, and that the resulting gains and losses are coded according to a prospect theory value function (Kahneman & Tversky, 1979). This simple model explains the stylized findings in the goal setting literature, while also offering several new testable predictions.

Gonzalez, Richard and George Wu (2003).  "Composition Rules in Original and Cumulative Prospect Theory"

Original and cumulative prospect theory differ in the composition rule used to combine the probability weighting function and the value function. We test these composition rules by estimating prospect theory's weighting and value function using two-outcome cash equivalents, a domain where original and cumulative prospect theory coincide. We apply these estimates to three-outcome cash equivalents, a domain where the composition rules of the two theories differ. We find systematic under-prediction for cumulative prospect theory and systematic over-prediction for original prospect theory. We use these findings to motivate new areas for theoretical and empirical investigation.

Shu, Suzanne and George Wu (2003). "Belief Bracketing: Can Partitioning Information Change Consumer Judgments?"

Firms often choose whether to present information in narrow or broad brackets. For example, a firm may provide financial performance in daily, weekly, or monthly formats. What influence does this bracketing have on consumer judgments? We propose that when individuals form beliefs about an underlying process based on bracketed information, the information is first evaluated based on its representativeness to the hypothesis under consideration, and then integrated into the overall judgment using a process that shows strong primacy and recency effects. Since bracketing affects both the representativeness-based coding step and the integration step, the final judgment will be affected by the size of the brackets. This is tested and confirmed in a series of five studies, using a variety of measures and contexts (investment categorization, restaurant rating, and probabilistic judgment). Although these studies vary in the use of memory, the frequency of judgment, and the type of judgment, the results of all five studies provide support for the existence of belief bracketing effects. The overall finding is that judgments are more extreme for information delivered in broad brackets, as our model predicts. We also find bracketing effects for behavioral intentions and for accuracy.

Wu, George and Richard Gonzalez (1999).  "Dominance Violations and Event Splitting in Decision under Uncertainty"

A standard requirement of rationality is that preferences obey stochastic dominance.  In this paper, we investigate a new variety of dominance violation from the domain of uncertainty. We find that subjects systematically value a packed prospect, $x if one of two mutually exclusive events E1 or E2 obtains, less than an unpacked and dominated prospect, $x if E1 obtains, and $x-e if E2 obtains.  We account for these violations in terms of subadditivity of probability judgments (Tversky and Koehler, 1995): unpacking an event into constituent components increases the total probability assigned to that event.  We discuss the implications of these dominance violations for compositions rules in prospect theory.  

Wu, George (1999). "Temporal Risk and Probability Weights: A Descriptive Model of Delayed Resolution of Uncertainty"

Many meaningful decision problems are choices among gambles with delayed resolution of uncertainty (DRU). Notably, students of decision making have concentrated their attention largely on gambles with instantaneously resolved uncertainty. A descriptive theory is proposed for evaluating gambles with DRU such that period gambles (i.e., gambles resolved at the same time) are evaluated by cumulative prospect theory (Tversky and Kahneman, 1992). In this context, the probability weighting function can depend on the timing of uncertainty resolution and thus captures both attitudes toward risk and preferences for early or delayed resolution of uncertainty. Stochastic stationarity conditions are used to relate the period weighting functions. It is argued that a second-order stochastic stationarity condition adapted from axiomatizations of hyperbolic discounting will produce an analogous property of hyperbolic probability discounting. The model makes some sharp predictions for decision behavior in delayed resolution settings, most notably preferences for delayed resolution for small probabilities of gains and most losses. In addition, this model may provide some insight into the origins of the non-linearities of the prospect theory probability weighting function.