1-4 of 4 Results

  • Keywords: loss aversion x
Clear all

Article

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.

Article

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.

Article

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.

Article

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.