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Prospect Theory and Political Decision Making  

Ferdinand M. Vieider and Barbara Vis

Prospect theory—a psychologically founded account of decision making under risk and uncertainty—revolutionized how economists and, later, political scientists thought about decision making under uncertainty. Conceptually, prospect theory is based on two central notions: reference dependence, which is the notion that the utility of outcomes is defined over changes in outcomes from a reference point instead of over absolute outcome levels; and likelihood dependence, which is the notion that people distort probabilities non-linearly when making a decision. Likelihood dependence gives rise to the possibility and certainty effects—changes in probabilities are given much more weight if they fall toward the probability endpoints than if they fall into intermediate probability ranges. Reference dependence gives rise to the reflection effect, predicting mirrored risk attitudes for gains and for losses; and to loss aversion, predicting that people display a disproportionate dislike for losses. Prospect theory has been extensively applied in the literature on political decision making. Two observations stand out. One, some aspects, such as the reflection effect, have received considerably more attention than others, such as loss aversion or likelihood dependence. Two, there is a twin challenge arising from the combination of this selective modelling and ex post rationalization. A step-wise procedure may help making modelling approaches more principled and systematic. This could furthermore help predicting future decision making behaviour—an aspect that has been neglected in favour of fitting past data.


Flood Damage Assessments: Theory and Evidence From the United States  

Laura Bakkensen and Logan Blair

Flooding remains one of the globe’s most devastating natural hazards and a leading driver of natural disaster losses across many countries, including the United States. As such, a rich and growing literature aims to better understand, model, and assess flood losses. Several major theoretical and empirical themes emerge from the literature. Fundamental to the flood damage assessment literature are definitions of flood damage, including a typology of flood damage, such as direct and indirect losses. In addition, the literature theoretically and empirically assesses major determinants of flood damage including hydrological factors, measurement of the physical features in harm’s way, as well as understanding and modeling protective activities, such as flood risk mitigation and adaptation, that all co-determine the overall flood losses. From there, common methods to quantify flood damage take these factors as inputs, modeling hydrological risk, exposure, and vulnerability into quantifiable flood loss estimates through a flood damage function, and include both ex ante expected loss assessments and ex post event-specific analyses. To do so, high-quality data are key across all model steps and can be found across a variety of sources. Early 21st-century advancements in spatial data and remote sensing push the literature forward. While topics and themes apply more generally to flood damage across the globe, examples from the United States illustrate key topics. Understanding main themes and insights in this important research area is critical for researchers, policy-makers, and practitioners to better understand, utilize, and extend existing flood damage assessment literatures in order to lessen or even prevent future tragedy.


Genocide and Religion in Times of War  

Manus I. Midlarsky

To understand the relationship between religion and genocide in time of war, one needs to distinguish between sacred and secular political religions. Among the genocidal events inspired by political religions based on sacred texts are the St. Bartholomew’s Day Massacre, the Sack of Magdeburg, the British Civil War in Ireland, and Bosnia. I also examine several groups pursuing a genocidal agenda claiming religious justification: al-Qaeda and Islamic State of Iraq and Syria (ISIS). Civil religions and secular political religions discussed are the French Revolution, Italian Fascism, Nazism, and Stalinist Communism. Lacking the restraints found in traditional religions, secular political religion is most dangerous. Large-scale genocides are best explained by diachronic processes entailing subordination followed by gain and then loss by the perpetrators. The presence of loss in various forms is found in virtually all cases. Emotions that typically do not influence routine politics—such as anger and fear—are engaged. All of the cases, even those of minimal loss, are influenced by international events. Without the presence of war, genocides like the Holocaust, and those of the Armenians and Tutsis, are inconceivable. Even as an exclusionary ideology, traditional religion is neither a necessary nor a sufficient condition for all forms of genocide in time of war. But religion can be an enabler that together with other antecedents can lead to genocide. Sacred religious sites can be sensitive locations whose violation inspires violence. Radicalization of religious leaders can occur when their religion appears to be under attack, especially during or following a period of widespread violence.


Prospect Theory in International Relations  

Janice Gross Stein

Analysis of the use of prospect theory since the mid-1980s identifies significant impact on research on important puzzles in international security and international political economy. Research since the mid-1990s has identified the scope conditions of framing effects, loss aversion, and patterns of probability estimation on international behavior. New research using multiple methods has strengthened the validity of findings on the impact of framing effects and loss aversion under different conditions. Future research opportunities for psychological explanations of international behavior are identified.


Prospect Theory, Loss Aversion, and Political Behavior  

Francesco Passarelli and Alessandro Del Ponte

Prospect theory introduces several anomalies in the behavior of rational agents, including loss aversion, the reflection effect, probability weighting, and the certainty effect. Loss aversion occurs relative to the current state of the world, called reference point. Being loss averse causes people to prefer the current state of affairs above and beyond the expected utility that comes from a risky political change, engendering a status quo bias. Yet, bias is asymmetric due to the reflection effect: people are too tepid toward advantageous platforms or candidates, whereas they are not critical enough of detrimental policies or bad politicians. Both rich and poor citizens take similar stances on nonpartisan issues (such as national defense): this happens because they evaluate uncertain policy changes relative to a reference point. Citizens welcome radical political platforms with greater enthusiasm than incremental proposals. Generally, under prospect theory societal conflict is smoother than under expected utility theory. Older societies are more prone to preserving the status quo than younger ones. These properties also affect the choice of voting rules. Loss aversion induces people to prefer more prudent voting rules and preserve the status quo. Hence, agents favor higher majority thresholds or even unanimity over simple majority in constitutional choice. The status quo bias supports the persistence of policy cycles, with prolonged drifts in one direction before a trend reversal. In sum, loss aversion and other anomalies pinpointed by prospect theory offer insightful predictions with which to study political phenomena.


Rational Choice Theory in Political Decision Making  

Scott H. Ainsworth

Rational choice theory builds from a very simple foundation. To wit: individuals are presumed to pursue goal-oriented behavior stemming from rational preferences. Rational choice theory benefits from the very precise formulations of its assumptions. Individual-level rationality is generally defined as having complete and transitive preferences. Both completeness and transitivity have precise, formal definitions. From complete and transitive preferences, one can develop utility function presentations reflecting those preferences. Utility functions have the advantage of establishing a measure and allowing one to assess attitudes toward risk. That is, utility functions can reflect risk acceptance, risk neutrality, or risk aversion. Although some rational choice theorists focus on individual-level decision making, most rational choice theorists consider the ways in which individuals’ decisions are aggregated into some sort of social outcome or social preference order. The aggregation of individuals’ preferences occurs in both social choice and game theoretic models. Arrow’s theorem is the best-known result in social choice theory. Arrow showed that the rationality of individuals’ preferences could not be readily preserved at the group level when those individuals’ preferences were aggregated. That is, individual-level rationality does not ensure group-level rationality. Put slightly differently, irrationality at the group level cannot impugn rationality at the individual level. Other examples highlighting the difficulty of aggregating individuals’ preferences into a collective outcome abound. For instance, game theoretic presentations of the collective action problem highlight how individually rational decisions can lead to suboptimal outcomes. Rational choice models have been used to model interactions in a wide array of political institutions. Rational choice models have been developed to tackle some of the most challenging concepts in the social sciences, even in areas long thought impenetrable to rational choice theorizing. For instance, concepts such as ideology or personal identification have typically been used as preestablished descriptors. In contrast to treating those concepts as extant descriptors, rational choice theorists have modeled the endogenous development of ideologies and personal identification. Given the complexity of social phenomena, the relative parsimony and the clarity of rational choice models can be particularly helpful. The usefulness of rational choice models stems from their parsimony and their applicability to a wide range of settings.


Risk Assessment: Prospect Theory and Civil–Military Affairs  

Gregory Winger

Prospect theory is a behavioral theory that holds that human attitudes toward risk are not fixed but can shift dramatically based on how a decision is framed. Instead of assessing different options in the abstract, individuals form a point of reference and weigh decisions based on how the outcomes may impact that point. When a proposition is framed as a potential gain, individuals exhibit risk-averse behavior and prefer certain gains over potentially more lucrative gambles. Conversely, when an identical question is posited as a loss, people become risk acceptant and are willing to gamble on potentially significant losses rather than accept even modest setbacks. Since first gaining prominence through the works of Daniel Kahneman and Amos Tversky, prospect theory has provided a valuable analytical tool for analyzing political decision making. Within international relations, the theory has been leveraged to gauge individual leaders’ attitudes toward risk when making decisions under uncertain conditions. This approach has yielded keen insights into a diverse range of episodes and issues including economic reforms, crisis management, and casualty sensitivity. Prospect theory also holds significant potential within the field of civil-military affairs. Although political leaders and military commanders ostensibly serve national interests, each possesses distinct interests and responsibilities. This means that even when facing a similar situation, civilian and military leaders may assess the situation from contrasting frames of reference and consequently possess conflicting attitudes toward risk. Such situations will lead to competing policy prescriptions and engender civil-military conflict. Incorporating prospect theory into our analysis of civil-military affairs provides a valuable tool for identifying policy preferences within individual actors and explaining how different frames of reference and risk propensities can shape civil-military disputes.