Modern economic theory rests on the basic assumption that agents’ choices are guided by preferences. The question of where such preferences might have come from has traditionally been ignored or viewed agnostically. The biological approach to economic behavior addresses the issue of the origins of economic preferences explicitly. This approach assumes that economic preferences are shaped by the forces of natural selection. For example, an important theoretical insight delivered thus far by this approach is that individuals ought to be more risk averse to aggregate than to idiosyncratic risk. Additionally the approach has delivered an evolutionary basis for hedonic and adaptive utility and an evolutionary rationale for “theory of mind.” Related empirical work has studied the evolution of time preferences, loss aversion, and explored the deep evolutionary determinants of long-run economic development.
Nikolaus Robalino and Arthur Robson
Markus Wagner and Davide Morisi
Research has shown emotions affect decision-making in ways that do not simply undermine rationality. Instead, in recent decades researchers have recognized that emotions also motivate and focus individuals and moderate how they make decisions. Initial research into emotions divided these simply into positive and negative, but this perspective has largely been displaced in political psychology by an emphasis on the impact of distinct emotions; among these, anxiety has received the most scholarly attention, rivaled only by anger. The causes of anxiety, also termed fear and unease, are diverse, but research highlights certain attributes of situational evaluation such as low self-control, low certainty, and low external agency. Once present, anxiety has important consequences for decision-making. First, anxiety increases how much information individuals seek out, a pattern of behavior meant to reduce uncertainty. Second, anxiety decreases heuristic processing and weakens the reliance of underlying convictions in determining decisions. Instead, anxious individuals are more likely to think systematically about choices they face. Importantly, anxiety can affect choices and decisions even if they are not directly related to what caused anxiety to emerge, that is, if anxiety is incidental rather than integral. In addition to influencing how people make decisions, anxiety may also directly influence the decisions individuals make. Thus, anxiety increases risk aversion, leading individuals to choose safer paths of action. Anxiety also makes individuals less likely to take action at all, with the most common response being withdrawal and passivity. Applied to political decision-making, anxiety may have the important consequence of decreasing political participation. Research into the role of anxiety in decision-making is fast moving and vibrant, but to become fully established it needs to ensure rigor in measurement and research design; this will require considerable methodological research. Substantively, future research should focus on the effects of elite messages on anxiety as well as on how anxiety influences citizen attitudes and evaluations.
All conservatives have something in common, a particular argument, even if they disagree about the rationale behind this argument. The conservative argument can be stated thus: Some orders ought to be maintained because they are existing and well established. The reason given by conservatives why orders that are existing and well established ought to be maintained is varied. Typically, it has to do with pessimism with regard to the human moral nature or human rationality, or it has to do with pessimism with regard to rational argumentation combined with optimism about what has evolved historically speaking. The reasoning, then, is instrumental and pragmatic. However, there are also conservatives who claim that an existing and well-established order, such as a nation, a Volk, a species, or some cherished institution, has final value.
Hendrik Schmitz and Svenja Winkler
The terms information and risk aversion play central roles in healthcare economics. While risk aversion is among the main reasons for the existence of health insurance, information asymmetries between insured individual and insurance company potentially lead to moral hazard or adverse selection. This has implications for the optimal design of health insurance contracts, but whether there is indeed moral hazard or adverse selection is ultimately an empirical question. Recently, there was even a debate whether the opposite of adverse selection—advantageous selection—prevails. Private information on risk aversion might weigh out information asymmetries regarding risk type and lead to more insurance coverage of healthy individuals (instead of less insurance coverage in adverse selection). Information and risk preferences are important not only in health insurance but more generally in health economics. For instance, they affect health behavior and, consequently, health outcomes. The degree of risk aversion, the ability to perceive risks, and the availability of information about risks partly explain why some individuals engage in unhealthy behavior while others refrain from smoking, drinking, or the like. Information has several dimensions. Apart from information on one’s personal health status, risk preferences, or health risks, consumer information on provider quality or health insurance supply is central in the economics of healthcare. Even though healthcare systems are necessarily highly regulated throughout the world, all systems at least allow for some market elements. These typically include the possibility of consumer choice, for instance, regarding health insurance coverage or choice of medical provider. An important question is whether consumer choice elements work in the healthcare sector—that is, whether consumers actually make rational or optimal decisions—and whether more information can improve decision quality.
In many countries of the world, consumers choose their health insurance coverage from a large menu of often complex options supplied by private insurance companies. Economic benefits of the wide choice of health insurance options depend on the extent to which the consumers are active, well informed, and sophisticated decision makers capable of choosing plans that are well-suited to their individual circumstances. There are many possible ways how consumers’ actual decision making in the health insurance domain can depart from the standard model of health insurance demand of a rational risk-averse consumer. For example, consumers can have inaccurate subjective beliefs about characteristics of alternative plans in their choice set or about the distribution of health expenditure risk because of cognitive or informational constraints; or they can prefer to rely on heuristics when the plan choice problem features a large number of options with complex cost-sharing design. The second decade of the 21st century has seen a burgeoning number of studies assessing the quality of consumer choices of health insurance, both in the lab and in the field, and financial and welfare consequences of poor choices in this context. These studies demonstrate that consumers often find it difficult to make efficient choices of private health insurance due to reasons such as inertia, misinformation, and the lack of basic insurance literacy. These findings challenge the conventional rationality assumptions of the standard economic model of insurance choice and call for policies that can enhance the quality of consumer choices in the health insurance domain.
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.
Jeffrey W. Taliaferro
Prospect theory is one of the most influential behavioral theories in the international relations (IR) field, particularly among scholars of security studies, political psychology, and foreign policy analysis. Developed by Israeli psychologists Daniel Kahneman and Amos Tversky, prospect theory provides key insights into decision making under conditions of risk and uncertainty. For example, most individuals are risk averse to secure gains, but risk acceptant to avoid losses (loss aversion). In addition, most people value items they already posses more than they value items they want to acquire (endowment effect), and tend to be risk averse if they perceive themselves to be facing gains relative to their reference point (risk propensity). Prospect theory has generated an enormous volume of scholarship in IR, which can be divided into two “generations”. The first generation (1990–1999) sought to establish prospect theory’s plausibility in the “real world” by testing hypotheses derived from it against subjective expected-utility theory or rational choice models of foreign policy decision making. The second generation (2000–present) began to incorporate concepts associated with prospect theory and related experimental literature on group risk taking into existing mid-level theories of IR and foreign policy behavior. Two substantive areas covered by scholars during this period are coercive diplomacy and great power intervention in the periphery as they relate to loss aversion. Both generations of prospect theory literature suffer from conceptual and methodological difficulties, mainly around the issues of reference point selection, framing, and preference reversal outside laboratory settings.