Annu. Rev. Polit. Sci. 2005. 8:1–21 doi: 10.1146/annurev.polisci.8.082103.104911 c 2005 by Annual Reviews. All rights reserved Copyright
PROSPECT THEORY AND POLITICAL SCIENCE Jonathan Mercer Department of Political Science, University of Washington, Seattle, Washington 98195-3530; email:
[email protected]
Key Words
decision making, framing, loss aversion
■ Abstract Prospect theory is the most influential behavioral theory of choice in the social sciences. Its creators won a Nobel Prize in economics, and it is largely responsible for the booming field of behavioral economics. Although international relations theorists who study security have used prospect theory extensively, Americanists, comparativists, and political economists have shown little interest in it. The dominant explanation for political scientists’ tepid response focuses on the theoretical problems with extending a theory devised in the lab to explain political decisions in the field. This essay focuses on these problems and reviews suggested solutions. It suggests that prospect theory’s failure to ignite the imagination of more political scientists probably results from their aversion to behavioral assumptions and not from problems unique to prospect theory.
INTRODUCTION A decade of laboratory experiments revealed that people systematically violate the axioms of subjective expected utility theory (Kahneman et al. 1982). These findings led two psychologists, Daniel Kahneman and Amos Tversky, to create prospect theory—a descriptive theory of decision making under risk. They argued that how we interpret our choices, as gains or as losses, influences how much risk we will take. How we frame information should not influence our judgment, but it does. As politicians know well, people feel differently about a policy guaranteed to ensure a 90% employment rate than they feel about a policy guaranteed to provide a 10% unemployment rate. Kahneman & Tversky (1979) found that framing a policy as a loss (10% unemployment) will put someone in a domain of loss, and framing it as a gain (90% employment) will put someone in a domain of gain. If we frame an outcome as a loss, we will assume more risk to avoid that outcome than if we framed the identical outcome as a gain. The observation that a frame influences risk acceptance was surprising for at least two reasons. First, we should pay attention to our absolute gains and losses or our total welfare, not changes in our welfare relative to some arbitrary reference point. Second, whether we are in a domain of gain or loss should not affect our attitude toward risk. Yet, we tend to take risky bets when we are in a domain of loss. Kahneman & Tversky 1094-2939/05/0615-0001$20.00
1
2
MERCER
created an elegant and generalizable theory that has become the leading alternative to subjective expected utility arguments. If the findings from the lab extend to the field, then the political implications are profound. We should expect policy makers in a domain of loss to take risks they would be unlikely to take if they were in a domain of gain. They might escalate a military intervention that is going poorly, gamble on a risky rescue mission, choose war over peace, or embrace radical economic reform because they are in a domain of loss. More generally, risk aversion might account for the relative stability of the international system, explain how one might solve collective action problems, and help identify the best way to influence an adversary. Kahneman & Tversky’s research has had an enormous influence on decision theory (Read 2002) and in economics. As acknowledged by the Nobel Prize committee when it awarded Kahneman (Tversky died in 1996) the 2002 Nobel in economics,