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Behavioral Decision Theory  

Kazuhisa Takemura

Behavioral decision theory is a descriptive psychological theory of human judgment, decision making, and behavior that can be applied to political science. Behavioral decision theory is closely related to behavioral economics and behavioral finance. Behavioral economics is an attempt to understand actual human economic behavior, and behavioral finance studies human behavior in financial markets. Research on people’s decision making represents an important part of these fields, in which various aspects overlap with the scope of behavioral decision theory. Behavioral decision theory focuses on the decision-making phenomena that are broadly divisible into those under certainty, those under risk, and others under uncertainty that includes ambiguity and ignorance. What are the theoretical frameworks that could be used to explain the decision-making phenomenon? Although numerous theories related to decision making have been developed, they are, in essence, often broadly divided into two types: normative theory and descriptive theory. The former is intended to support rational decision making. The latter describes how people actually make decisions. Both normative and descriptive theories reflect the nature of actual human decision making to a degree. Even descriptive theory seeks a certain level of rationality in actual human decision making. Consequently, the two are mutually indistinguishable. Nonetheless, a major example of normative theory is regarded as the system of utility theory that is widely used in economics. A salient example of descriptive theory is behavioral decision theory. Utility theory has numerous variations, such as linear and nonlinear utility theories. Most theories have established axioms and mathematically developed principles. In contrast, behavioral decision theory covers a considerably wide range of variations of theoretical expressions, including theories that have been developed mathematically (such as prospect theory) and those expressed only with natural language (such as multiattribute decision-making process models). Behavioral decision theory has integrated the implications of the normative theory, descriptive theory, and prescriptive theory that help people to make better decisions.


Sunk Costs and Political Decision Making  

Charles A. Miller

The “sunk costs fallacy” is a popular import into political science from organizational psychology and behavioral economics. The fallacy is classically defined as a situation in which decision-makers escalate commitment to an apparently failing project in order to “recoup” the costs they have already sunk into it. The phenomenon is often framed as a good example of how real decision-making departs from the assumption of forward-looking rationality which underpins traditional approaches to understanding politics. Researchers have proposed a number of different psychological drivers for the fallacy, such as cognitive dissonance reduction, and there is experimental and observational evidence that it accurately characterizes decision-making in certain contexts. However, there is significant skepticism about the fallacy in many social sciences, with critics arguing that there are better forward-looking rational explanations for decisions apparently driven by a desire to recoup sunk costs – among them reputational concerns, option values and agency problems. Critics have also noted that in practical situations sunk costs are informative both about decision makers’ intrinsic valuation for the issue and the prospects for success, making it hard to discern a separate role for sunk costs empirically. To address these concerns, empirical researchers have employed a number of strategies, especially leveraging natural experiments in certain non-political decision making contexts such as sports or business, in order to isolate the effects of sunk costs per se from other considerations. In doing so, they have found mixed support for the fallacy. Research has also shown that the prevalence of the sunk costs fallacy may be moderated by a number of factors, including the locus of decision-making, framing, and national context. These provide the basis for suggestions for future research.


Expected Utility and Political Decision Making  

Jona Linde

Expected utility theory is widely used to formally model decisions in situations where outcomes are uncertain. As uncertainty is arguably commonplace in political decisions, being able to take that uncertainty into account is of great importance when building useful models and interpreting empirical results. Expected utility theory has provided possible explanations for a host of phenomena, from the failure of the median voter theorem to the making of vague campaign promises and the delegation of policymaking. A good expected utility model may provide alternative explanations for empirical phenomena and can structure reasoning about the effect of political actors’ goals, circumstances, and beliefs on their behavior. For example, expected utility theory shows that whether the median voter theorem can be expected to hold or not depends on candidates’ goals (office, policy, or vote seeking), and the nature of their uncertainty about voters. In this way expected utility theory can help empirical researchers derive hypotheses and guide them towards the data required to exclude alternative explanations. Expected utility has been especially successful in spatial voting models, but the range of topics to which it can be applied is far broader. Applications to pivotal voting or politicians’ redistribution decisions show this wider value. However, there is also a range of promising topics that have received ample attention from empirical researchers, but that have so far been largely ignored by theorists applying expected utility theory. Although expected utility theory has its limitations, more modern theories that build on the expected utility framework, such as prospect theory, can help overcome these limitations. Notably these extensions rely on the same modeling techniques as expected utility theory and can similarly elucidate the mechanisms that may explain empirical phenomena. This structured way of thinking about behavior under uncertainty is the main benefit provided by both expected utility theory and its extensions.


Bounded Rationality and Cognitive Limits in Political Decision Making  

Brooke N. Shannon, Zachary A. McGee, and Bryan D. Jones

Bounded rationality conceives of people engaging in politics as goal oriented but endowed with cognitive and emotional architectures that limit their abilities to pursue those goals rationally. Political institutions provide the critical link between micro- and macro-processes in political decision-making. They act to (a) compensate for those bounds on rationality; (b) make possible cooperative arrangements not possible under the assumptions of full or comprehensive rationality; and (c) fall prey to the same cognitive and emotional limits or canals that individual humans do. The cognitive limitations that hamper individuals are not only replicated at the organizational level but are in fact causal.


Foreign Policy Belief Systems and Operational Code Analysis  

Akan Malici

Henry Kissinger once remarked, “As a professor, I tended to think of history as run by impersonal forces. But when you see it in practice, you see the difference personalities make.” It is common sense that a state’s foreign policy cannot be explained without reference to the beliefs of such leaders as Barack Obama, Donald Trump, Vladimir Putin, Angela Merkel, or Kim Jong Un, to name a few. It is, therefore, ironic that leaders have mattered little for much of the international relations discipline’s history. Structural approaches with foci on the distribution of power, international institutions and domestic politics have been dominant. To be sure, scholarship on belief systems has been present since the 1950s. Early key concepts included the decision maker’s “definition of the situation,” the “ecological environment,” and the “attitudinal prism.” This scholarship laid an important foundation; however, at the time, it did not generate competitive research programs. Agent-centered approaches remained secondary and beliefs were seen as residual variables. They were also seen as “unobservable”—difficult to assess and operationalize. Indeed, rigorous methods that would enable the scientific study of belief systems have long been absent. Over time such challenges were addressed successfully, and these efforts were catalyzed by scholarly advances and also by real-world developments. In the real world, it was mainly the end of the Cold War that illustrated the insufficiency of structural theories. Under Mikhail Gorbachev the Soviet Union took a fundamentally new course, and it gave up power. The dominant structural theories did neither predict the ensuing events nor could they explain them. They were “caught flat-footed,” as one scholar wrote. What really mattered, it seemed, was what these theories did not pay much attention to: namely decision makers’ belief-systems. Of particular relevance are decision makers’ operational code beliefs. Along with the general literature on belief systems, the operational code research program began in the 1950s. It gained still more prominence with the work of Alexander George and Ole Holsti in the 1960s and 1970s. A decision maker’s operational code is constituted by his answers to questions such as: What is the essential nature of political life? Is the political universe essentially one of harmony or conflict? What is the fundamental character of one’s political opponents? What is the best approach for selecting goals for political action? The most significant advances in the operational code research program were then made in the 1980s and beyond by Stephen Walker and his students. The progress occurred on the theoretical, methodological, and empirical plane, and through their work the research program has become, (and continues to be) a mainstay in contemporary international relations scholarship.


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.