Prospect Theory, Rational Choice, and International Relations

Author(s): Jack S. Levy

Source: International Studies Quarterly, Vol. 41, No. 1 (Mar., 1997), pp. 87-112
Published by: Blackwell Publishing on behalf of The International Studies Association
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(1997) 41, 87-112

International
StudiesQuarterly

Prospect Theory, Rational Choice, and

InternationalRelations
JACK

S.

LEVY

RutgersUniversity
A half-decadeafterthe firstsystematic
applicationsof prospecttheoiyto
international
relations,scholarscontinueto debate itspotentialutilityas a
oftheexperimental
framewvork.
Keyquestionsincludethevalidity
theoretical
international
behaviorthat
theirrelevanceforreal-world
themselves,
findings
and
decisionsbycollectiveactorsin interactive
settings,
involveshigh-stakes
withrespecttorationalchoice.In this
theconceptualstatusofprospecttheory
debatesovertheseissues.I review
and methodological
essayI assesstheoretical
workin social psychologyand experimentaleconomicsand conclude that
challengesto the externalvalidityof prospecttheoiy-basedhypothesesfor
behavioraremuchmoreseriousthanchallengestotheirinternal
international
betweenprospecttheoryand expectedvalidity.I emphasizethesimilarities
regardinglossaversionand thereflection
theory,
arguethathypotheses
utility
effectare easilysubsumedwithinthe latter,and thatevidenceof fi-aming
are moreproblematicforthe
effects
and nonlinearresponsesto probabilities
forfutureresearchincludetheconstruction
theory.I concludethatpriorities
ofhypotheses
on theframing
offoreignpolicydecisionsand researchdesigns
fortestingthem;theincorporation
lossaversion,and thereflection
offraming,
decisionmaking;and experieffect
intotheoriesofcollectiveand interactive
tothepoliticaland strategic
contextofforeign
mentalresearchthatissensitive
policydecisionmaking.

It is ironic thatjust as rational choice has become the most influential paradigm in
international relations and political science over the last decade, expected-utility
theoiy has come under increasing attack by experimental and empirical evidence
of systematicviolations of the expected-utilityprinciple in individual-choice behavior. Experimental evidence suggests that people tend to evaluate choices with
respect to a reference point, overweight losses relative to comparable gains, engage
in risk-aversebehavior in choices among gains but risk-acceptantbehavior in choices
among losses, and respond to probabilities in a nonlinear manner. Many of these
patterns have been confirmed by field studies of consumer, investment, and insurance behavior. This challenge to expected-utility theory has been reinforced by the
development of prospect theory (Kahneman and Tversky, 1979), which integrates
these descriptive patterns into an alternative theory of riskychoice.
Ration-aland Cognitive
Autihor'snote:Earlierversionsof thisarticlewere presentedat a conferenceon-"Con-trasting
(1994), at thePeace ScienceSociety(1995), and at colloquiaat Duke Univelrsity,
TheoriesofWar"atTexas A & M University
ofCaliforniaat San Diego, and at Columbia
theUniversity
ofCalifomiaat Berkeley,the University
Ohio StateUniiversity,
I would also like to thankJeffrey
Berejikian,Bill Boettcher,Bill Clark,PatrickJames,Rose McDermott,Cliff
University.
fortheirhelpfu-l
comments.
Mor-gan,
MichaelSinatra,NancySpaulding,JaniceStein,and HarrisonWagner? 1997 Initertnational
StudiesAssociation.
350 MaisiStreet,Malden,MA 02148,USA, and 108 CowleyRoad,OxfordOX4 lJF,UK.
PuLblishecd
byBlackwellPublisliers,

88

ProspectTheory,Rational Choice

Applicationsofprospecttheorysuggestsome novel and theoretically

interesting
hypothesesabout foreignpolicy and internationalrelations,but attemptsto test
thesehypothesesin thecomplexarena ofworldpoliticsfaceseriousconceptualand
methodologicalproblems.' Althoughsome oftheseproblemswerenotedpreviously
(Jervis,1992; Levy, 1992b; Shafir,1992), recentapplicationsof the theoryand its
core hypothesesto internationalrelationsfrequently
failto come to termswiththese
problems. Moreover,there is an ongoing debate about the conceptual statusof
prospect theorywith respect to rational choice. Some rational choice theorists
question the validityof the experimentalevidence upon whichprospecttheoryis
based and concludethatthetheoryiswrong.Otherrationalchoicetheoristsconcede
thatthefindingsmaybe valid butinsistthattheycan be subsumedwithinexpectedutilitytheoryor rationalchoice more broadly.Given theseconcerns,thisis a good
time to take stock,assess the potentialutilityof prospect theoryfor explaining
internationalbehavior,evaluate the debate betweenprospecttheoryand rational
choice,and suggestsome potentiallyusefuldirectionsforfutureresearch.
I begin witha briefreviewof the experimentaland empiricalanomalies in the
expected-utility
theoryof individualchoice and a summaryof how prospecttheory
was constructedto explain theseanomalies. I thenconsidersome of the methodological problemsconfrontingprospecttheoryand its application to international
relations,includingproblemsofinternalvalidity(can we be confidentthatobserved
behaviorin the laboratoryderivesfromthe hypothesizedeffectsofprospecttheory
ratherthanfromotherfactors?)and problemsofexternalvalidity(can we generalize
fromthe experimentalfindingsto real-worldbehavior?).I thenturnto some ofthe
theoreticalconsiderationsthat currentlylimit prospect theory'sutilityfor the
understandingof internationalrelations: prospect theorylacks a theoryof the
framing,and as a theoryofindividualchoiceitdoes notprovidea theoiyofcollective
decisionmakingofstateactorsor a theoryofthestrategicinteractionbetweenstates.
I end witha discussionof the relationshipbetweenprospect theoryand rational
choice and suggestionsas to the mostpromisingdirectionsforfutureresearch.2
A BriefReview of Prospect Theory and the Experimental Evidence
The expected-utility
principle posits that actors tryto maximize their expected
utilitybyweightingthe utilityof each possible outcome of a givencourse of action
bythe probabilityof itsoccurrence,summingover all possible outcomesforeach
strategy,and selectingthatstrategywiththe highestexpected utility.Expectedutilitytheoryassumesthatan actor'sutilityfora particulargood is a functionofnet
asset levelsof thatgood and thatpreferencesover outcomesdo not depend upon
currentassets. Currentassets affectmarginalutilitiesand preferencesover strategies, not preferencesover outcomesor terminalstates.
I willsave forlatera discussionof the relationshipbetweenprospecttheoryand
rationalchoice,but I mustclarifya fewthingshere. Most applicationsofexpectedutilitytheoryin the social sciences add the auxiliaryassumptionthat individuals
have diminishingmarginalutilityformost goods, whichis reflectedby a concave
This assumptionis descriptively
function.3
accurateformanytypesofbehavior
utility
1 For-empiricalapplicationsof pr-ospect
theoi-yin internationalrelationssee Far-i-ham
(1992), McDer-mott
(1992),
McInerney(1992), Richa-dson(1992), Taliaferro(1994), Weyland(1996), Berejikian(1995), and Mintzand Geva (n.d.).
For experimentalstudiessee Geva and Mintz(1994) and Kower-t
and Hermann (1994).
2 This studydevelops some of the argumentsin Levy(1997). The followingsectionbuildson Levy(1992a, 1996a).
3 Auxiliaryassumptionsinclude substantiveassumptionsabout the specificprefer-ences,
motivations,aindaims of
to a
actor-sin varioussocial and politicalcontexts(Simon, 1986; Kavka, 1991:373). They help give empir-ical
conatent
theoi-y
bylinkingabstractelementsin thelogicalstructui-e
ofthemodelwiththeempiricalrealitythatthemodel pur-ports
to explain.

JACK S. LEVY

89

and enhances the analyticalpower of rational choice theories. But diminishing

marginal utilityis not an essential component of expected-utilitytheory,and
violationsof the formerare not necessarilyinconsistentwiththe latter.4
Moreover,violationsof expected utilityare not necessarilyviolationsof rational
theoryis based on a setofaxioms thatallowsus to construct
choice. Expected-utility
a Von Neumann-Morgenstern(1944) utilityfunctionfromordinal preferences
(Morrow,1994:29-32). Rational choice, definedmore broadlyto requirea consistentand transitive
preferenceorderand the selectionfromavailable alternativesso
as to maximizesatisfaction
(Riker,1990:172; Young, 1975:364-5), makesno further
axiomaticassumptions.A nonlinearcombinationof probabilitiesand utilities,for
theory(particularlythe reductionof compound
example, violatesexpected-utility
lotteries)but is consistentwithmanyotherversionsof rationalchoice theory.
The experimentalevidencesuggeststhatthereare a numberofrespectsin which
people do not behave accordingto the assumptionsand predictionsof expectedutilitytheory.There is substantialevidence,firstofall,thatpeople are moresensitive
point
to changes in assetsthan to net asset levels,to gainsand lossesfroma reference
ratherthanto levelsofwealthand welfare(Kahnemanand Tversky,1979:277). This
(Tverskyand Kahneman, 1991:1039) is the central analytic
reference
dependence
postulateof
assumptionof prospecttheory.It runscontraryto the expected-utility
an individualutilityfunctionthatis definedover levelsof assets.5
Referencedependence is particularlyimportantbecause people treatgains and
overvaluelossesrelativeto comparablegains.This asymmelossesdifferently-they
tryof gains and losses is reflectedin the factthatthe value functionis steeperon
the loss side than on the gain side. People rarelyaccept symmetricgambles that
involvea 50 percentprobabilityofwinningx and a 50 percentprobabilityoflosing
x. The evidenceforthisphenomenon oflossaversionis quite robustand persuasive
(Kahneman and Tversky,1979; Tverskyand Kahneman, 1986, 1991; Kahneman,
Knetsch,and Thaler, 1991).
One implicationofloss aversionis thatpeople tendto value whattheyhave more
of relinquishinga
than comparable thingstheydo not have, and thatthe disutility
good is greaterthan the utilityof acquiringit. People who acquire an item often
refuseto sell itat a pricetheywould noteven considerpayingforitin thefirstplace,
so thatsellingprices tend to exceed buyingprices.This overevaluationof current
(Thaler, 1980:43-7), and it has been repeatedly
possessionsis the endowment
effect
substantiatedin a varietyoflaboratorytests.6The effectis not a trivialone, withthe
typicalratioof sellingpricesto buyingpricesbeing about twoto one (Knetschand
Sinden, 1984, 1987; Knetsch,1989; Kahneman, Knetsch,and Thaler, 1990:1336,
1991; Tverskyand Kahneman, 1991; Camerer, 1995:665-70).7
4 In one of the fir-st
applicationsof subjectiveexpected utilityto economics,forexample, Fr-iedmanand Savage
marginalreturns)and
(1948) posit a utilityfunctionthat includes regions of both convexity(reflectingincr-easing
concavityto explain insuranceand gamblingbehavior.Dacey (1992) uses an S-shaped utilityfunctionin a model of
and insurr-ection
and applies it to the Palestinianintifada.
deter-rence
5 Althoughthereis some directevidencethatindividualbehavioris moresensitive
inwealth
tochangesor differences
evidenceofreferencedependence
thanto absolutelevelsofwealth(van de Stadt,Kapteyn,and van de Geer, 1985), m-ost
is in-direct
and derivesfromtestsof loss aversion,the reflectioneffect,and other-testableimplicationsof reference
dependence. A moreaccuratebutless parsimoniousmodel ofchoicewould specifyutilityas a functionofbothnetassets
and deviationsfroma referencepoint.
6 Evidence of a divergencebetweenwillingness-to-pay
and willingness-to-accept
applies both to relativelytrivial
highlyvalued goods. Thaler-(1987: 110), forexample,findsa substantial
itemssuch as school coffeemugsand to nmor-e
theirriskofdeathby.001 anldtheamount
discrepancybetweentheamountthatpeople wouldbe willingto payto reduLce
thattheywould be willingto accept to increasetheirriskof death by .001.
7 The endowmenteffectdoes not apply to normal commercialtransactions.Money expended on an item is not
treatedas a loss, and goods pur-chasedfor-eventual sale or bartergenerallydo not geneiate an endowmenteffect
(Kahneman,Knetsch,and Thaler, 1991:200). This findinghas importantimplicationsfol-thei-oleof bal-gainingchips
in negotiations.

90

Thzeory,
RationalChoice
Prospect

Furtherevidence in supportof the hypothesesof loss aversionand the endowment effectcan be found in the observed tendencytoward statusquo choices.
Because people treatthecostsofmovingawayfromthe statusquo as losses and the
benefitsof moving away fromthe statusquo as gains, and then overweightthe
formerrelativeto the latter,people stayat the statusquo more frequentlythan
expected-utility
theorywould predict. This statusquo bias is demonstratedin a
number of experimentaland field studies of consumerand investmentbehavior
(Knetsch and Sinden, 1984; Samuelson and Zeckhauser, 1988; Knetsch, 1989;
Hartman,Doane, and Woo, 1991).
The asymmetry
betweenlosses and gains is manifestednot onlyin loss aversion
and the endowmenteffectbut also in riskorientation.
People tend to be risk-averse
withrespect to gains and risk-acceptantwithrespect to losses.8 This means that
individualvalue functionsare usuallyconcave in the domain of gains and convex
in thedomain oflosses,witha reflection
around thereferencepoint(Kahneman
effect
and Tversky,1979:268). This patternof riskorientationsis repeatedlyfoundfora
varietyof individualsand situations,but it may break down forverysmall probabilitiesor for catastrophiclosses (Slovic, Fischhoff,Lichtenstein,Corrigan,and
Combs, 1977; Fishburn and Kochenberger, 1979; Kahneman and Tversky,
1979:282-3; Slovic and Lichtenstein,1983; Tverskyand Kahneman, 1986; Quattroneand Tversky,1988).9
Because of the asymmetry
of gains and losses and the role of the referencepoint
in definingthese distinctdomains, the identification,
orframing,of the reference
point can have a criticaleffecton choice. A change in framecan resultin a change
in preferences(preference
reversal)even ifthevalues and probabilitiesassociatedwith
outcomesremain the same. This has repeatedlybeen demonstratedin laboratory
experiments(Gretherand Plott,1979; Kahneman and Tversky,1979; Slovic and
Lichtenstein,1983; Tverskyand Kahneman, 1986; Tversky,Slovic,and Kahneman,
1990; Camerer, 1995:652-65; Roth, 1995:68-75). In choices betweenalternative
medical treatmentprocedures, for example, it makes a differencewhether a
particulartreatmenthas a 90 percentsurvivalrateor a 10 percentmortality
rate.10
In many simple choice problems the framingof the referencepoint is largely
predeterminedby the situation(or the experimentaldesign). In a staticsituation

8 Loss aver-sion-i
and r-isk
or-ientation
are analyticallydistinct.Loss aver-sion
is r-eflected
in the steepnessof thevalue
on the loss side, whereas r-isk
orientationis reflectedin the curvatureof the value function.The conceptsof
f'unction
loss aversion,the erndowment
effect,and the statusquo bias can all be applied to choice behaviorunder conditionsof
cer-tainty
wher-e
thereare no r-isky
gamblesas wellas to choicesunder-i-isk.Tverskyand Kahneman(1991), forexample,
develop a model of loss aversionin risklesschoice thathas nothingto do withlotter-ies.
9There is a potential levels-of-an-alysis
problem that requir-esfur-therexploration. Experimentaltestson r-isk
in the domains of losses an-dgains gener-ally
pr-opernsities
utilize "between-subjects"
designs,so that distinctsets of
subjectsar-etestedfor-choices in each domain. The concernis thatsin-glesubjectsin a "within-subjects"
design might
in r-epeatedchoices.
moreeasilyr-ecognizethe equlivalenceofchoice problemsand ther-efore
behave more consistently
Consequently,aggregateresultsfrombetween-subjects
designsdo not logicallyimplya reflectioneffectin individuals,
and we do not knowhow manyof the 70 per-cent
who are riskaverse forgains belon-gto the 70 percentwho are risk
stillexist
acceptantforlosses.Experimentsbased on an individual-level
analysisshowthattendenciestowar-d
reflectivity
but thattheyare weaker(He-sheyand Schoeniaker,1980; Camnerer,
1995:633).
10The preferencereversalphenomenonalso createsa potentiallyseriousmethodologicalpr-oblem
forutilitytheoi-y
because it raises the question of "elicitationbiases": differentmethods of elicitingprefer-ences
generate different
and thusdifferent
r-esponses
preferenceorders(Camerer-,1995:625-6). This is evidentfromthefollowingexperiment:
Consider twogamblesthatare mathematically
equivalentin termsofexpectedvalue: one involvesa highprobabilityof
a modestamountof money(the P lottery)and the otherinvolvesa low pr-obability
winn-ing
ofwinninga largeramount
thatif
of money(the $ lottei-y).
Experimentalstudies(by economistsas well as psychologists)repeatedlydemonstr-ate
asked to choose betweenthe two,mostpeople preferthe P lottery.However,iftheyare asked to give the lowestp-ice
at whichtheywould sell each lotteryif theyowned both, most people put a higherprice or-reser-vationlevel on the
$ lotter-y
(Gr-etherand Plott,1979; Slovic and Lichtenstein,1983; Tver-sky,
Slovic,and Kahneman, 1990; Tverskyan-d
Thaler, 1990; Caimler-er,
1995:657-65). Apparentlychoices are correlatedwithprobabilitieswhilepricesare correlated

JACK S. LFVY

91

that involvesa well-definedstatusquo, for example, actorsusuallyframechoice

problems around the statusquo. Thus, Tverskyand Kahneman (1991:1046-7)
argue that"the referencestateusuallycorrespondsto the decisionmaker'scurrent
position,"buttheyconcede thatthisis notalwaysthecase. Expectations,aspirations,
socialnorms,and social comparisonscan also influencetheframingofthereference
point.
Dynamicsituationsare particularlylikelyto induce variationsin thewaypeople
selectreferencepointsbecause oftheabsence ofa stablestatusquo thatmightserve
as an obviousfocalpoint.In a situationthatinvolvesa sequence ofsuccessivechoices
ratherthan a singlechoice, forexample, does an actordefineher referencepoint
in termsofher assetpositionat thebeginningofthe seriesofchoicesor withrespect
to her currentassetpositionaftera seriesof actions?Is thisaffectedbywhetherthe
outcomesofeach decisioninvolvegains or losses?Are people more likelyto shiftto
the currentframeaftera successionof gains than aftera successionof losses?
to gains more
The experimentalevidence suggests that people accommodate
rapidlythan to losses,and, in fact,do so immediately.This instantendowment
effect
(Kahneman, Knetsch,and Thaler, 1990:1342; Jervis,1992) suggeststhat aftera
seriesofgains an individualwilltreatthepossibilityofa subsequentsetbackas a loss
behavior
ratherthan as a foregonegain, overweightit,and engage in risk-seeking
to maintainher cumulativegains againstthatloss. Aftera seriesof losses,however,
an individualwill not accommodate as quicklybut instead adopt the cumulative
frameand engage in risk-seeking
behaviorto eliminatethoselosses.This phenomenon raisesinteresting
questionsas to howdifferent
people accommodateto change,
in whatdirection,how quickly,and underwhatconditions.The literatureprovides
fewanswersto this question-other than to say thatframingis highlysubjective,
poorlyunderstood,and basicallyunexplored.
The factthatpeople sometimesframearound expectationor aspirationlevels
ratherthan the statusquo suggeststhatthe widelyused concept of the statusquo
bias is misspecified.The bias is reallya reference
pointbias,a greatertendencyto move
toward the referencepoint than expected-utility
theorypredicts.The reference
point bias subsumesthe statusquo bias wheneverthe referencepoint is definedas
the statusquo, and under those conditionsitwillbe stabilizingand reinforcethe
statusquo. If the referencepoint is not congruentwiththe statusquo, however,
the referencepoint bias is destabilizingand reinforcesmovementawayfromthe
statusquo.
Experimentalstudiesalso show thatindividualchoice behaviordemonstratesa
in contrastto the linearcombinationofutilitiesand
toprobabilities,
nonlinear
response
probabilitiesin expected-utility
theory.Firstof all, studiesbeginningwithAllais
(1953) have shownthatindividualsoverweightoutcomesthatare certainrelativeto
outcomesthatare merelyprobable. Because of thiscertainty
(Kahneman and
effect
Tversky,1979:265) people attachgreatervalue to the completeeliminationof risk
than to the reductionof riskbya comparable amount.
People also tend to overweightsmallprobabilitiesand to underweightmoderate
and high probabilities (Kahneman and Tversky,1979; Camerer, 1995:620-2).
This means thatexcept forsmall probabilitiespeople tend to give more weightto
the utilityof a possible outcome than to its probabilityof occurrence,whereas
P lotter-ies
anld
withpayoffs.(Economistsoftenuse the ter-mprefer-ence
rever-sal
to referto thisbehavior-i-egar-dinlg
$ lotteries,whereaspsychologists
use the termto referto a broader categoryof framingeffects.)
theory,
The preferencereversalphenomenon violatesnearlyall theoriesof preference,includingexpected-utility
respon-ses
an-dther-efor-e
differen-t
pr-efer-ence
becaulseitsuggeststhatdiffer-enit
elicitationprocedur-es
gen-er-ate
differ-ent
The factthatanlindividual
orders,in violationof what Camerer (1995:625-6, 657-65) calls "procedure invarian-ce."
pricesA higherthanB does not necessal-ily
implythatthe individualprefersA over B. This raisesquestionsabout the
a Von-Neumann-Moi-geinstei-in
utilityfunction.
abilityto or-derpr-eferences
and about exactlyhowone con-structs

92

RationalChoice
Prospect
Theory,

expected-utility
theorypositsthatutilitiesand probabilitiesare givenequal weight.
Althoughsmall probabilitiesare overweighted,extremelysmall probabilitiesgenerateunpredictablebehavior.I I Extremelyunlikelyeventssometimesare treatedas
if theywere impossible and at other times are overweightedin actors' decision
calculations (Kahneman and Tversky,1979:282-3), as illustratedby the unpredictabilityof insurancebehaviorwithrespectto rare catastrophes.
Kahneman and Tversky(1979) developed prospect theoryto integratethese
observedpatternsinto an alternativetheoryof riskychoice. They distinguishtwo
phases in the choice process. In the editing
phasethe actor identifiesthe reference
point,the available options,the possible outcomes,and the value and probability
ofeach oftheseoutcomes.In theevaluation
phaseshe combinesthevalues ofpossible
outcomes (as reflectedin an S-shaped valuefunction)with theirweightedprobabilities(as reflectedin theprobability
weighting
function)and then maximizesover
'2
the product(the "prospectiveutility",).
Note that attitudestoward risk are determined by the combination of the
S-shaped value functionand theprobability
weightingfunctionand notbythevalue
functionalone. Althoughthiscombinationusuallygeneratesriskaversionforgains
of smallprobabilitiescan trigger
and riskacceptance forlosses,the overweighting
a reversalof riskpropensitiesunder certainconditions,depending on the precise
shapes of the two functions(Kahneman and Tversky,1979; Levy, 1992a: 183-4).
Thus, the existenceof smallprobabilitiesis a necessarybut not sufficient
condition
forriskaversionin the domain oflosses and riskacceptancein thedomain ofgains.
In termsof debates betweenprospecttheoryand expected-utility
theory,reference dependence and framingeffectsare critical.If people alwaysframedaround
the statusquo itwould be possibleto subsumeloss aversionand thereflectioneffect
withinexpected-utility
theorybypositingan S-shapedutilityfunctionwitha steeper
slope on theloss side. But preferencereversalsinducedbychangesin framesrather
than by changes in subjectiveutilitiesor probabilitiesare much more difficult
to
reconcilewithexpected-utility
theoryor withrationalchoice theoriesmore generally. Evidence that behavior varies depending on whetherthe glass is seen as
or half-full
does not easilylend itselfto a rationalchoice explanation.
half-empty
Referencedependence is inconsistentwiththe Coase theorem,which suggests
that if transactioncosts are negligiblethe valuation of a propertyrightis independent of who owns that right,so that initial entitlementsdo not affectfinal
allocations (Kahneman, Knetsch, and Thaler, 1990; Camerer, 1995:670). But
evidence suggeststhatinitialentitlementsdo make a differenceand thatrates of
exchange are affectedby whetherone is givingup a good or acquiring it. An
a partofher endowment
individualmayprefergood x to good ywhenx is currently
but prefergood y to good x when y is part of her endowment,so thatpreferences
are reference-dependent
(Tverskyand Kahneman, 1991:1039; Tverskyand Simonson, 1993).13More generally,thereis evidencethatone's preferencebetweenx and
y may depend on the presence or absence of a third option z (Tverskyand
Kahneman, 1991; Tverskyand Simonson, 1993).

1I1Althoughth-er-e
shiftsto unldeiweighting
is no conclusiveevidenceas to the specificpoin-tat which oveiweightiing
oi whetherthispointvariessignifican-tly
acr-ossindividualsor conditions,preliminar-y
eviden-cesuggeststhatit fallsin
the .10-.15 range (Her-shey
and Schoemaker,1980).
12 It should be clear thatprospecttheoi-y
belongs to the generalclass ofutilitymaximizationtheories,whichinvolve
theol-y
thecombin-ationofprobabilitiesand utilitiesand some formofmaximizationofvaluLe.
Whereasexpected-utility
positsa lin-earcombinationofutilitiesand probabilities,prospecttheol-y
positsthatutilitiesare weightedbya fuLnction
thatis nonlinearin probabilities.
13 Onletheoreticalimplicationis thatitis not alwayspossibleto construct
cur-ves
thatare reversibleaiid
indifference
nonin-tersecting
(Knetsch,1989).

JACK S. LEVY

93

These reference-dependent,
or framing,effects
violatetheassumptionofconsistentand transitivepreferencesthatis essentialnot onlyto expected-utility
theory
but also to nearlyall rationalchoice theoriesas well.14 Framingeffectscannot be
reconciledwiththeprincipleofthe"independenceofirrelevantalternatives"(Luce
and Raiffa,1957:27; Tverskyand Simonson, 1993:1179) or the related invariance
assumption,which requires that logicallyidenticalchoice problems should yield
identicalresults(Tverskyand Kahneman, 1986:S252-7). Althoughinvarianceis not
a formalaxiom ofexpected-utility
theory,itis an "invisiblebackgroundassumption"
of the theory(Camerer, 1995:652). Arrow(1982:6) refersto invarianceas "extensionality"and describesit as a "fundamentalelementof rationality."Ferejohnand
Satz (1995:80) concede thatcases in which"choices are based on preferencesbut
preferencescan depend on the situation,"do not fit "classical" conceptions of
rationality,but suggest "weaker forms of rationality"that do not satisfythe
independence hypothesis, such as regret models (Bell, 1982; Loomes and
Sugden, 1982).'5
In sumrnary,
framingeffectsare not consistentwithexpected-utility
theoryand
probablynot consistentwithmostconventionalconceptionsof rationalchoice,but
theoristshave constructedweakerformsof rationalchoice theorythatare compatible withframingeffects.
Implications
forInternational
Relations

Prospecttheoryand the descriptivefindingsupon whichit is based generatea rich

set of hypothesesabout internationalbehavior. I have discussed these at greater
lengthelsewhere(1992b, 1996a, 1996b), but let me mentiona fewhere forthose
less familiarwiththe theory.(1) State leaders take more risksto maintaintheir
internationalpositions,reputations,and domesticpoliticalsupportthantheydo to
enhance thosepositions.(2) Aftersuffering
losses (in territory,
reputation,domestic
political support,etc.), political leaders have a tendencynot to accommodate to
thoselosses but insteadto take excessiverisksto recoverthem(where"excessive"is
definedwithrespectto predictionsbased on expected value). Aftermakinggains
politicalleaders have a tendencyto accommodateto thosegains and takeexcessive
risksto defendthemagainstsubsequentlosses.(3) Because accommodationto losses
influencedecision makers'calculationsand
tendsto be slow,sunk costsfrequently
statebehavior.
Withrespectto strategicinteraction,(4) it is easier to deter an adversaryfrom
takingan actionthan to compel him to terminatean actionor to undo whathe has
alreadydone, and easier to deteran adversaryfrommakinggains thanto deterher
fromrecoveringlosses. (5) It is easier forstatesto cooperate in the distributionof
oflosses. (6) Cooperationamong statesor otheractors
gainsthanin thedistribution
in social dilemmas (in which individualincentivesto defecttheoreticallylead to
sociallysuboptimaloutcomes,such as a prisoner'sdilemma) is more likelyif the
issue involvescooperation in not taking fromthe commons than if it involves
contributingto a public good, forthe formerinvolvesforegonegains whereasthe

14 Some versionsof rationalchoice theoryare broad enough to allow forintransitivities.

Fishburn(1982, 1984), for
assumption.Note also thatin theirdefense of
example, has developed axiomatic models that relax the transitivity
rational choice Ferejohn and Satz (1995:77-8) reject the "universalist"assumptionthatindividualsact to maximize
utilityacross all circumstances,
and adopt a versionof "partialuniversalism"in which"agentsact as utilitymaximizers
in some settingsbut not in others."
15 Althoughstandardutility-based
game theorydoes not currentlyallowforreferencedependence, Brams's(1994)
theoryof moves generatesequilibriathatare sensitiveto the positionfromwhichone begins and thusincorporatesa
formof referencedependence.

94

ProspectThzeory,
Rational Chzoice

latterinvolvesactual losses, at least in the shortterm(Brewerand Kramer,1986;

Levy,1996b).
These and relatedhypothesesprovideintuitively
plausibleexplanationsforsome
importantpatternsof internationalbehaviorthatdo not appear to followdirectly
fromstandardrationalchoiceexplanations,16butthereare some seriousconceptual
and methodologicalproblemsthatmustbe overcomebeforewe can utilizeprospect
theoryas a reliableframework
forexplanationin internationalpolitics.In the next
section I look at problems of the internalvalidityof the laboratoryexperiments
themselves,and in the followingsectionI turnto problemsof generalizingfrom
highlystructuredlaboratoryexperimentsto the "ill-structured"
world of internationalrelations.
Methodological Problems: Questions of InternalValidity
Althoughsocial psychologistshave repeatedlydemonstratedthatindividualchoice
behaviorin the laboratorysystemically
deviatesfromthe predictionsof expectedutilitytheory,economistshave been more skeptical.They argue that observed
anomalies are the artifactsof experimentalprocedure and can be explained by
standard economic theory.Subjects are faced withhypotheticalratherthan real
choices and consequentlyhave fewincentivesto expend the mentaleffortto make
optimumdecisionsin complexchoice problems.They are confrontedwithunfamiliar problemsin one-shotexperimentsand have no opportunityto learn through
the disciplineand incentivesof marketinstitutions.
Finally,in bargainingexperimentssubjectshave an incentive(or at least a habitualtendency)to misrepresent
buyingand sellingprices.Withreal choices thatinvolveample financialincentives
and opportunitiesforlearning,economistsargue, the anomalous behaviorshould
disappear (Cox and Isaac, 1986:648-9; Camerer, 1995).
These concernsled Gretherand Plott(1979) to construct"a seriesofexperiments
designed to discreditthe psychologists'worksas applied to economics" (p. 623),
withrespectto the preferencereversalphenomenon (see footnote10
particularly
earlier).They used monetaryincentivesystemsto heightenmotivation,and they
controlledforincome,orderofrepetitivechoices,and strategicbargainingeffects.17
They concluded that although their research design "controlled for all of the
economic-theoretic explanations of the phenomenon which we could find . . . the

preferencereversalphenomenon . .. remains"(p. 634). This studywas influential

in bringingthepreferencereversalphenomenonto theattentionofeconomists,but
doubtsabout theadequacy oftheGrether/Plott
experimentaldesignpersisted,and
othereconomistsconductedfurtherexperimentaltestsofpreferencereversalsand
otherobservedanomalies in expected-utility
theory.
The question of incentiveshas attractedspecial attention,but the evidence is
mixed.18Gretherand Plott(1979) found no incentiveeffectsin theirstudyof the
preference reversal phenomenon.'9 Pommerehne, Schneider, and Zweifel
(1982:572-3) foundthat,"Even when the subjectsare exposed to strongincentives
formakingmotivated,rationaldecisions,the phenomenon of preferencereversal
does notvanish,"thoughtherateofpreferencereversalwas lowerthanGretherand

1CThis is not to implythatthesepatternsare logicallyin-consistent

witha ration-al
choice fi-amework.

standai-dpr-ocedui-e
forelicitingpi-efer-ences
is the Becker,DeGi-oot,and Mar-schak(1964) procedure,in
whiclhr-ational
subjectshave strongincentivesto statetheirtrueresel-vationpricesforsellinglotterieswithwhichthey
have been enldowed.For a bh-ief
descriptionsee Roth (1995:19-20).
18Econ-omists
gen-erally
use monetaryamouLn-ts
thatare comparable (when-cum--ulated)
to wage ratesof emllployed
membersof the subjectpools-typically$8-$20 per hour.
19Plott (1987:120) suggeststhat there is more evidence for incentiveeffectsin grouLpas opposed to individual
17 The

behavior.

JACK S. LEVY

95

Plott (1979) found. Reilly (1982) used a within-subjects

design and found that
increased payoffsdo reduce the rate of reversalsbut thata substantialpercentage
ofreversalsremains.Furtherworkusing a wide varietyofproceduresled to similar
conclusions(Slovicand Lichtenstein,1983; Tverskyand Kahneman, 1986:S273-4;
Camerer, 1989; Tversky,Slovic, and Kahneman, 1990). Tverskyand Kahneman
(1992:315), for example, conclude that "all major violationsof expected utility
theory... were obtainedbothwithand withoutmonetaryincentives."20
One could alwaysargue,ofcourse,thatthe incentivesused bytheseexperimenters are inadequate to elicitoptimizingbehaviorand thatconsequentlytheseexperimental findingscannot be generalized to the high-stakesworld of international
relations.This raises the practicalproblem thatlimitedresearchbudgets make it
impossibleto providelarge real monetaryrewardsforall subjects.One procedure
designed to get around thisprobleminvolvesa "randomlotteryincentivesystem,"
in whichsubjectsare informedthattheywillreceivethe actual payoffforone (and
only one) of theirchoices,whichwill be randomlyselected fromall of the choice
problems that theyplay. Evidence suggeststhat this procedure elicits approximately the same preferences as one in which subjects make one choice and
receive the actual payoffforthat choice (Camerer, 1989:82, 1995:634; Starmer
and Sugden, 1991).
Anotherapproach to the problem of creatingmeaningfulmonetaryincentives
involvesconductingthe researchin poorer societieswhere the ratio of monetary
reward to normal income is relativelyhigh.2' Kachelmeier and Shehata (1992)
examined the impact of probabilitiesand monetaryincentiveson revealed risk
preferencesofChinese students,wheresubjectscould earn threetimestheirnormal
monthlyincome in one experimentalsession.The authorsfindthatthe hypothesized overweightingof small probabilities,confirmedrepeatedlyin the literature
forlowmonetaryincentives,holds forhighmonetaryincentives.They also findthat
althoughsubjectriskbehaviorchanges littleifchoice problemsinclude low monetaryincentives(relativeto the absence of incentives),largermonetaryincentives,if
real, do have some impact on risk orientation. Kachelmeier and Shehata
(1992:1137) conclude thatthe effectsof monetarypaymentsare real but somewhat
researchshouldexploretheimpactofmonetaryincentives
complexand thatfurther
in combinationwithalternativepaymentstructures,
alternativeelicitationmethods
(to deal withthe preference-reversal
phenomenon), and alternativedecision contexts.This complexityis reflectedin Binswanger's(1980) studyof village farmers
in India. Riskbehaviorwas influencedbyan increasein payoffs
butnotbythewealth
of the subjects.22
These and otherstudiesofincentiveeffectslead Roth (1995:76) to conclude that
"anomalous choice behavior. .. survivedboth thechange fromhypotheticalto real
choices and increases in the payofflevel.... The debate has now shiftedto the
underlyingcauses of the phenomena and . .. [to the questionofwhether]market
environments
willmoderatethe observedeffects."Criticsof existingexperimental
workargue thatthe endowmenteffect,disparitiesbetweenwillingness-to-pay
and
willingness-to-accept,
preferencereversals,and other observed deviationsfrom
the absence of
expected utilitycan be tracedto transactioncosts,taskunfamiliarity,

20 There may be a slighttenidency

forplayinggambleswithr-ealpayoffsto generatemor-eriskaver-sionthail do
pulr-ely
hypotheticalchoices (Battalio,Kagel, and Jiranyakul,1990; Hogar-thanidEinihorn,1990; Schoemaker,1990;
Camerer-,1995:634).
21 Oine danger thatmay not be adequately addressed in existingexperimentalstuLdies
is thatincome effectsand
culturaleffectsmaybe confounded.This suggestsa researchstrategythatinvolvescomparisonsacrossdifferent
cultures
whileholding the ratioof moneyincentivesto income relativelyconstant.
22 The lastpointsupportsthe prospecttheoryassumptionthatultilityis definedover changes in wealthratherthan
absolute levelsofwealth.

96

Prospect
RationalChzoice
Theory,

opportunitiesforlearning,or strategicincentives(or habitualtendencies)to overstatesellingpricesand understatebuyingprices(Coursey,Hovis,and Schulze, 1987;

Brookshireand Coursey,1987).
Other studieshave controlledforthese possible effectsand have demonstrated
thatthe observedanomalies,thoughlowerin magnitudeunder certainconditions,
do not disappear. In one earlystudy,Reilly(1982), concernedthatsubjectsmight
not fullyunderstandthe natureof the taskor the logic of optimization,conducted
experimentsin smallgroups,providedgreateropportunitiesofinteractionwiththe
experimenter,and systematically
instructedsubjectsin themeaningoftheexpected
value concept; but preferencereversalsremained,thoughat a somewhatreduced
rate. Kahneman, Knetsch,and TIhaler(1990) conductedrepeated marketexperimentswithfullfeedbackaftereach trial to controlfor learning.They also used
induced-valuetokens(as opposed to real goods) to controlfortransactioncosts,but
found no evidence thatbuyingprices and sellingprices convergedover repeated
markettrials.
There is some danger thatthe terms"buyer"and "seller" mightinadvertently
induce strategicbehaviorand overstatethe gap betweenbuyingpricesand selling
prices. This led Gretherand Plott (1979) and then Franciosi,Kujal, Michelitsch,
and Smith(1993; cited in Camerer, 1995:666) to eliminatethe terms"buyer"and
"seller" fromthe instructionsto subjects.Franciosi et al. found somewhatlower
sellingpricesbut stilla large gap betweenbuyingpricesand sellingprices.Discrepancies betweenbuyingpricesand sellingpricesnarrowedbut did not disappear in
within-subjects
experimentaldesigns,whichelicitbothbuyingand sellingpricesin
the same individual (Harless, 1989; Kachelmeler and Shehata, 1992). Camerer
(1995:667) concludes that,"Overall,the data suggestthatcompetitionor learning
in marketsreduces the buying-sellingprice gap somewhat,in some settings,but
does not eliminateit.The gap is large forenvironmentaland consumergoods (like
wetlandsand mugs) and small forlotterytickets."
The argumentthat the observed anomalies in expected-utility
theoryare not
primarilyan artifactof lack of incentivesor learningopportunitiesin experiments
gains more supportfromfieldstudiesofconsumer,insurance,and financialmarket
behavior,where presumablythe ratio of monetaryincentivesto mental effortis
high.23Studiesofconsumerbehavior,forexample, showthatmodels thatincorporateestimatesofreferencepricesperformbetterthanstandarddemand models that
utilizeonlycurrentprices(Winer,1986; Hardie,Johnson,and Fader, 1993). Putler
(1988; noted in Tverskyand Kahneman, 1991:1055) estimatedseparate demand
elasticitiesforincreasesand decreases in prices relativeto a referencepoint and
foundthatelasticitiesforprice increaseswere twicethoseforprice decreases.24
There is also evidence thatthe volume forstocksthathave declined in price is
lowerthan the volume forstocksthathave increased in value, thoughtax considerations would predict the opposite (Shefrin and Statman, 1985; Kahneman,
Knetsch,and Thaler, 1990:1345). This supportstheendowmenthypothesisand the
corollaryhypothesisthatpeople tend to hold loserstoo long. Finally,Benartziand
Thaler (1993) use hypothesesofloss aversionand mentalaccountingto explain the
"equitypremiumpuzzle,"thefactthatthediscrepancybetweenthereturnson stocks
and fixed-incomesecuritiesis too large to be explained byreasonable estimatesof
investor risk aversion.

23 Findingsof systematic
of
anomalies in expected-utility
theorygain some fur-ther
supportfromlaboratorystuLdies
animalbehavior,wheresimilarpatternsofchoiceunderconditionsofriskare obser-ved
(Battalio,Kagel, and McDonald,
1985; Kagel, 1987). Needless to say,questionsof cross-speciesgeneralizability
is highlycontestedterritory.
24 This is consistentwithexperimentalstudies of the endowmenteffect,
which generallyfind that selling prices
exceed buyingpricesby twoto one.

JACK S. LEVY

97

It is fairto concludethatfindingsofreferencedependence,theendowmenteffect,
the reflectioneffect,framingeffectsand preferencereversals,and nonlinear responses to probabilitiesin individualchoice have held up quite well in the face of
substantialcriticalscrutiny.Numerous and varied attemptsto demonstratethat
theseanomaliescan be explained byabsence offinancialincentivesor opportunities
forlearning,bytransactioncosts,or othereconomicvariableshave failed.Camerer
(1995:674), for example, concludes that "not a single major recent (post-1970)
anomaly has been 'destroyed'by hostile replication."It is true that the proper
controlsreduce the magnitudeof observed anomalies to a certainextent,which
suggeststhe need foradditionalresearchto determinethe conditionsunderwhich
thisis mostlikelyto occur,but the bottomline is thatthe anomalies persist.
The theoreticalimplicationsofthesedescriptivefindingsare less clear. Ifwe were
to adopt a Popperian criterionand evaluate theoriesby direct testsagainst the
evidence (Popper, 1959), thenwe mighthave to rejectexpected-utility
theoryas a
positivetheoryof individualchoice. As the economistPlott(1987:117) concludes,
"Iftheonlyquestionposed is Rationalchoice,trueor false?thentheansweris clearly
false.... The weakestformsofthe classicalpreferencehypothesisare systematically
at odds withthe facts."
But "True or false?,"in termsof directtestsof a theoryor itshypothesesagainst
the empiricalevidence,is not the onlyquestion,and social scientistshave increasinglyshiftedto a Lakatosian conceptionof scientificprogressand a demand that
theoriesbe testedagainst alternativetheories(Lakatos, 1970). Prospecttheoryis
one of a number of alternative theories of individual choice that behavioral
decision theoristshave constructedin an attemptto integrateobservedanomalies
in expected-utility
theoryinto a more descriptively
accuratetheoryof choice.25
Experimentalsocial psychologistsand economistshave conducted endless tests
of these theoriesagainsteach otherand againstexpected-utility
theory(Camerer,
1989, 1995; Harless and Camerer, 1994). The resultsare mixed. The general
conclusionis that"choice under uncertainty
is a fieldin flux"(Machina, 1987:121),
thatthereis "no consensusas to whetherany of the manyalternativetheoriesare
better than expected utilitytheoryin explaining behavior under uncertainty"
(Sopher and Gigliotti,1993:75), and that"none ofthealternativesto expectedutility
theory... consistently
organizethe data, so we have a long wayto go beforehaving
a complete descriptivemodel of choice under uncertainty"(Battalio,Kagel, and
Jiranyakul,1990:46).
There is anothersense in whichthe question "True or false?"is misleading.As
social scientistsour aim is not to testexpected-utility
theoryper se (whichtaken
alone is empiricallyemptyand nontestable)but modelsof social behaviorthatare
builton themicrofoundations
ofexpected-utility
theory(or prospecttheoryor some
alternative).We must also be carefulto specifyexactlywhat it is thatwe want to
explain. Althoughexpected-utility
theorymodels of individualchoice behaviorare
descriptivelyproblematic,there is a fairamount of evidence fromexperimental
studiesofassetmarketsand auctionsthatutilitymaximizationmodels do fairlywell
in accountingformanyaspectsofaggregatemarketbehavior(Friedman,Harrison,
and Salmon, 1984; Plott,1987; Smith,1991; Wittman,1991; Sunder, 1995; Roth,
informational
1995:49-60; Kagel, 1995). Experience,learning,incentive,
efficiencies,

25 Each of these alternativetheoriesrelaxes one or more of the axioms of expected-utility

theory.Other theor-ies
includeweightedutilitytheoiy(Chew, 1983), generalizedexpected-utility
theoiy(Machina, 1982), regrettheoiy(Bell,
1982; Loomes and Sugden, 1982), expected utilitywithrank-dependentprobabilityweights(Quiggan, 1982; Yaari,
1987), and lotteiy-dependent
utilitytheoiy (Becker and Sarin, 1987), to name a few.Prospecttheoiy has itselfbeen
significantly
revisedin the formof cumulativeprospecttheory(Tverskyand Kahneman, 1992). See Machina (1987),
Payne,Bettman,andJohnson (1992), and Camerer (1995:626-33) forrecentreviews.

98

ProspectTheory,Rational Choice

and discipline in marketsettingsmay create stable preferencesand optimizing

behaviorwhichare well-approximatedbyrationaleconomic models.26
These findingssuggestthatrationalchoice models of economicbehaviormaybe
usefulin spiteof the descriptiveinaccuracyofrationalmodels of individualchoice.
answersbecause
Psychologists
and economistsmaybothbe right.They getdifferent
questions:psychologists
wantto explain thepsychologyof
theyare askingdifferent
individualchoice (Cox and Isaac, 1986:648-9), whereaseconomistswantto explain
aggregatebehaviorin repetitivemarkettransactions.For theseand otherpurposes,
Plott(1987:120) argues,rationalchoice theoryis retainedin spiteof itslimitations
"because neitheran alternativetheorynor an alternativegeneral principleaccomplishes so much."
To conclude, the internalvalidityof laboratorystudies of individual choice
applicationsofprospect
behaviordoes notappear to be themajorissueconfronting
theoryhypothesesto internationalrelations.The major methodologicalchallenge
relates to the externalvalidityof those findingsfor the behavior of statesin the
complex and high-stakesworld of internationalrelations.The major theoretical
challenge is to move awayfromthe individuallevel and constructprospecttheorybased models of stateforeignpolicyand internationalinteractions.I now turnto
these issues.
Problems of External Validity:
Generalizing fromLaboratoryExperiments27
The main problem is that the descriptivegeneralizationsupon which prospect
theoryis based emergefromexperimentalresearchin highlystructuredlaboratory
settingswhichare veryunlikelyto be replicatedin the complex empiricalworldof
internationalrelations.In thelaboratorysubjectsare usuallygivena choice between
a certainoutcome and a lotterythatinvolvestwoor more possible outcomeswith
knownvalues and probabilitiesand thereforewithexpected values thatare known
and easilycompared. The framingofthe referencepoint is inherentin thewaythe
analystsetsup the choice problem.The empiricalanalysisis facilitatedby the use
ratesor inflationand unemployof monetaryoutcomesor in some cases mortality
ment rates,whichare measurable on an intervalscale and whichcan be roughly
scaled intoutilities.The experimentscontrolforthe possible effectsof extraneous
variables or attemptto randomize them over a large number of subjects.The
subjectsare given a one-timechoice and receive a payoffthat depends on their
choice alone and not on choices by an adversary.The researchdesign is set up in
sucha waythatexpected-utility
choices,
theoryand prospecttheorypredictdifferent
so that interpretationof the results of most of these experimentsis relatively
straightforward.
choice problemsforeign
These conditionsare rarelysatisfiedin theill-structured
policyleaders typicallyface. How individualpoliticalleaders frametheirreference
forthe analystto identify.The probabilities
point is highlysubjectiveand difficult
and utilitiesof outcomes-and, in fact,the prioridentification
of possible options
and theirconsequences-are not given but instead are judgments and values of
political leaders about which we have veiy little information.28Actors usually
26 There are some importantexceptions in this observed gap betweenindividualand marketrationality(Plott,
1987:40), and furtherresearchis necessaryto specifythe conditionsunderwhichthisgap occurs.
27 See alsoJervis(1992), Levy(1992b), Shafir(1992), and Stein (1992).
28 Froma prospecttheoiyper-spective,
of theprobabilities.
Evenifwe
thereis anotherproblemwiththemneasurement
the suLbjective
estimatesof decisionmakers,it is notclearwhethertheseestimateswould be the
could identify
probability
weightingfunction.Forvaluesaftertheapplicationofthepr-obability
subjectivepr-obabilities
themselves
or thetransformned
verbalstatementsofprobabilitiessee Boettcher(1995).
a good discussionof problemsinvolvedin interpreting

JACK S. LEVY

99

confronttworiskyoptionsratherthanone, fordoing nothingor selectingthestatus

quo or a negotiatedagreementalso involvesrisks.These risksare compounded by
the factthat each option has futureconsequences which require a balancing of
presentand futurerisks,29and by the factthatthese consequences are a function
of others'choices as well as one's own. Thus, whichof the options is more riskyis
oftendifficult
to defineconceptuallyor measure empirically.30
Consequently,whereaslaboratorystudiesfocuson theevaluationofgivenoptions
under staticconditionsof currentrisk in noninteractivesettings,foreignpolicy
decision making involvesthe criticaltasks of definingthe situation,editing the
choice problem,and then evaluatingoptionsunder dynamicand interactiveconditionsof presentand futureuncertainties.Consequently,it is extremelydifficult
forthe analystto determinewhetheran actorselectsa particularoptionbecause of
framing,lossaversion,thereflectioneffect,
and probabilityoverweighting,
or simply
because it is more highlyvalued in termsof a standardcost-benefit
calculusbased
on expectedvalue. Thus, itis difficult
to distinguishempiricallybetweena prospect
theoryexplanationand an expected-utility
or expected-valueexplanation.
The difficulty
of determiningempiricallyhow an actor definesher reference
point is particularlytroubling.If we cannot identifythe referencepoint independentlyofthebehaviorwe are tryingto explain,thenprospecttheoryand itskey
hypothesescannotbe testedand have no explanatorypower.AfterSaddam invaded
Kuwait,forexample, did he stand firmagainst U.S. and U.N. threatsbecause he
had accommodated to his gains and definedhis referencepoint around the new
statusquo, categorizedwithdrawalfromKuwaitas a loss,and consequentlyadopted
a risk-seekingstrategyof standing firmagainst U.S. threats?Or did Saddam
continueto definehis referencepoint around the prewarstatusquo but choose to
stand firmrather than accept a returnto that status quo preciselybecause he
perceivedthestatusquo as unacceptableand risksofwarwiththe U.S. as tolerable?
In the absence of independentevidence about how Saddam framedthe problem,
itis difficult
to differentiate
empiricallybetweenthesetwodifferent
explanations.31
The questionoftherelevanceofexperimentallaboratoryfindingsto thecomplex
worldraises anotherquestion,one thattakesus back to the point thatthe experimental evidence suggeststhatexpected-utility
models appear to provide a better
descriptionofaggregatemarketbehaviorthanofindividualbehavior.Althoughthis
is notconclusive,and although
evidenceregardingtheeffects
ofmarketinstitutions
additional research is necessary,this findingdoes raise the question of whether
othertypesofinstitutions,
includingpoliticalinstitutions,
mayalso workto limitthe
range of errors in individual choice behavior,32or whether,to the contrary,
nonrationaltendencies in individualbehavior are actuallyexacerbated in some
collectivedecision-makingsettings.33
The questionsfacingtheinternationalrelationsscholarare notexactlycongruent
withthoseofeitherthepsychologistor theeconomist.Our primaryunitsofanalysis
are neitherthe individualnor the market,but states,organizations,corporations,

29 Compoundingthisis thefactthatstandardeconomicmodels ofhowactorsdiscountfuturepayoffs

are notalways
consistentwithobsei-vedbehaviorin the laboratoiyor fieldstudies(Loewensteinand Elster,1992).
30 Note thatexpected-utility
theoi-yconfrontsnearlyall the same problems,save thoserelatedto the identification
of the referencepoint.
31 There are, ofcourse,alternative
psychologicalexplanationsbased on Saddam's personalityand/orhis emotional
responsesto the domesticand internationalcrises.
32 Theories of the rationality-inducing
tendenciesofbureaucraciesgo back to Weber(1947). Farkas (1996) explains
this gap between the nonrationalityof individualsand the rationalityof collectivedecision-makingbodies by an
evolutionai-y
model.
33 This is suggestedby group polarizationand groupthinktheories,among others(Myersand Lamm, 1976; Janis,
1982; 't Hart, 1990).

100

ProspectTheory,Rational Choice

and othercollectivepoliticalunits.Manypoliticalgoods are essentiallypublicgoods,

forwhich many conventionaleconomic theoriesbreak down (Monroe, 1991:7).
Althoughtheoreticalinsightsfromotherfieldsmayhave enormousheuristicvalue
for internationalrelationsscholars,we must be verycarefulin the waywe apply
those ideas and in thewaywe use evidencefromotherfieldsto supportthem.The
problem of the external validityof laboratoryexperimentsand, indeed, of the
validityoftheoreticalpropositionsacrossdisciplines,levelsofanalysis,and contexts
is indeed a seriousone.
Theoretical Limitationsof Prospect Theory
TheLimitedScopeoftheTheory

It is important,firstofall, to be clear aboutwhatprospecttheorydoes and does not

purport to explain. It is a theoryof choice under conditionsof risk. It is not a
complete theoryof decision makingbecause it focusesonlyon explainingchoices
given the basic parametersof the decision problem-the available options,their
possible outcomes and the values and probabilitiesassociated witheach, and the
framingof the referencepoint.These basic parametersthemselvesare exogenous
in thetheory.Thus, Kahnemanand Tversky(1979:275) restrict
themselvestochoice
problems"whereit is reasonable to assume eitherthatthe originalformulationof
the prospectsleaves no room forfurtherediting,or thatthe edited prospectscan
be specifiedwithoutambiguity."In its currentformprospecttheoryis a theoryof
theevaluationofprospects,nota theoryoftheeditingofchoices (Levy,1992a: 190).
It is a reference-dependent
theorywithouta theoryof the referencepoint.34
The S-shaped value functionand itsgreatersteepnesson the loss side were each
generatedinductivelyfromthe experimentalevidence,withoutan elaborate theoreticalexplanationforwhythesepatternscharacterizechoicebehavior.Tverskyand
Kahneman (1990:1057) do suggest,however,thatthevalue functionreflects"three
basic facts:organismshabituateto steadystates,the marginalresponse to changes
is diminishing,and pain is more urgentthan pleasure." The habituationto steady
states generates referencedependence, the diminishingmarginal response to
change in both directionsgeneratesthe S-shaped value functionand the reflection
of pleasure and pain is the ultimatejustificationof loss
effect,and "the asymmetry
aversion in choice" (Tverskyand Kahneman, 1991:1057). Althoughthese argumentsare in need of greatertheoreticaldevelopment,theyare certainlyplausible,
and probably more descriptivelyaccurate than the axioms of expected-utility
theory.35
Althoughprospecttheorywouldbe morecompleteifitprovideda morethorough
explanationforwhyregularitiesofloss aversionand thereflectioneffectoccur,the
factthatthese and otherregularitiesdo occur contributesto our abilityto explain
and predict behavior. A similar argument applies to rational choice theories.
Althoughthese theorieswould be more complete iftheyincorporateda theoryof
preferencesand explained how people definedand structureda choice problem,
theystillmake a criticalcontributionto our understandingof social behavior by
providing contingentexplanations of choice given structure,preference,and
information.

world of internationalpoliticsone can

Still,in the complex and ill-structured
make theplausiblecase thatmuchoftheexplanatorypowerlies in theidentification

'34 Some applicationsof prospecttheoi-y

to internationalrelationshave explored thepossible impacton framingof
affect(Farnham, 1992) and of historicallearningor analogical reasoning(McDermott,1992; Taliaferro,1994).
35 For a discussionof the psychophysical
underpinningsof prospecttheorysee McDermott(n.d.:ch. 2).

JACK S. LEVY

101

of the problem,the options,thevalues and probabilitiesofpossible outcomes,and

in theframingofthereferencepoint.How theseare specifiedbytheanalystinvolves
auxiliaryassumptionsthatcomprisea necessarycomponentofanytheoryofchoice.
Simon (1986:28) undoubtedlygoes too farin arguingthat,"Almostall the action,
all the abilityto reach nontrivialconclusions,comes fromthe factualassumptions
and verylittlefromthe assumptionsof optimization"that constitutethe core of
formaldecision theory,but it is conceivablethatthe editingof the choice problem
(includingtheidentification
ofthereferencepointand thevalue ofkeyparameters)
explains more ofthevariancein outcomesthandoes theevaluationofoptionsonce
thechoice problemhas been specified(see also Kavka, 1991:373). This is ultimately
an empiricalquestion,of course,and it is clear thatinternationalrelationsscholars
need to devote as much attentionto these auxiliaryassumptionsas theydo to the
formaldecision model itself.
The focuson auxiliaryassumptionsrefersto assumptionsabout both the basic
parametersof the choice problemand the processesthroughwhichthoseparameterswere generated by the actors.Althoughexpected-utility
theoryand rational
choice theoriesmore generallyhave been criticizedby some forexcessivereliance
on the "as if' assumption (M. Friedman, 1953; Moe, 1979)-for theirfocus on
behavioraloutcomesbut not on the questionof the processesthroughwhichthose
outcomesare generated-the same criticismcan be made of prospecttheory,or at
least of the evaluationphase ofprospecttheory.Both theoriestake the structureof
thechoice problem,preferences,constraints,
and information
as givenand attempt
to explain choices or outcomesbut not the interveningprocesses throughwhich
those choices are made.36
In Simon's (1976) terms,both expected-utility
theoryand prospecttheoryare
concernedwith"substantiverationality"ratherthan "proceduralrationality."Substantiverationality
refersto the optimizationof givengoals under givenconditions
and constraints,and is a functionof goals and situationalconstraintsbut not
interveningreasoning processes. Procedural rationality,on the other hand, depends on the appropriatenessof the interveningreasoning processes (Simon,
1976:130-1). Thus, the question of whetheror not people actuallyengage in the
hypothesizedinterveningcalculationsis essentialforthe validityof hypotheseson
proceduralrationalitybut not forthe validityof hypotheseson substantiverationality.Whereas expected-utility
theoryis concerned primarilywithsubstantiverationality,most theoriesofjudgment and choice in social psychologyare primarily
process-oriented.
In an importantsense, therefore,prospect theorydoes not fitneatlyinto the
debate." The evaluation phase of prospect theory-whichin"cognitive-rational
cludes a well-developedand formalizedtheorythatincorporatesloss aversion,an
S-shaped value function,and a probabilityweightingfunction,and which has
captured most of the attentionin applicationsof prospecttheoryto international
relations-has more in commonwithrationaleconomic theoriesthan it does with
process-orientedcognitivetheories.It is the theoryof editingand framing,once it
is developed, thatwill have more in commonwithcognitiveprocess theoriesthan
withrationaleconomic theory.
This is becoming more and more clear in the work of Tverskyand his colleagues.Tverskyand Thaler (1990:210-1), forexample, conclude thatpeople do

36 In truth,
"as if' assumption
thereis a debate betweenthoserationalchoice theor-ists
who adopt theinstrumentalist
and focuLson the pr-edictive
powerof rationalchoice theories,and "realists"who insistthatthe rationalityassumptio
is a descr-iptively
accur-atelaw of behavior. Sin-ceM. Friedman (1953), most formaldecision and game theor-ists,
particularly
in intern-ational
r-elations,
adopt the instrumentalist
view,and I shall assume thatperspectivehere; but for
a br-ief
summalyof the debate see J. Friedman(1996).

102

ProspectTheory,Rational Choice

not possess a set of predefined preferencesfor everycontingency,that people

constructpreferencesin theprocessofmakinga choice orjudgment,and thatthese
preferencesare influencedby the contextof choice and also by the procedures
involvedin makingchoices (Tverskyand Simonson,1993). This viewof"preference
as a constructive,
context-dependentprocess" raises some veryfundamentalquestionsabout anyformof utilitytheorybased on preference.
To conclude, the failureto endogenize all of the relevantvariablesat thisstage
of the prospecttheoryresearchprogramis a limitationof the theorybutnot a fatal
flaw.We should see it as an opportunityto improvethe theoryratherthan as a
reason to reject it.

There are otheraspects of prospecttheorythatcreate more serious limitations

in its abilityto help us understandinternationalbehavior.Two of these relate to
levels-of-analysis.
Whereas prospecttheoryis a theoryof individualdecision making, internationalrelationsinvolvesstrategicinteractionbetween collectivestate
actors.Prospecttheoryprovidesno explanationforhow individualpreferencesget
translatedintoforeignpolicydecisionsof statesor how the choices of twoor more
statesinteractto generatedyadicand internationaloutcomes.
TheAggregation
Problem

Most of whatwe want to explain in internationalpoliticsinvolvesthe actionsand

interactionsof states (and perhaps internationalorganizationsor corporations),
each of whichis, in principle,a collectivedecision-makingbody. The conceptsof
loss aversion,the reflectionof riskorientations,and framingwere developed for
individualdecisionmakingand testedon individuals,noton groups,and we cannot
automaticallyassume thattheseconceptsand hypothesesapply equallywell at the
collectivelevel.
There is a substantialclass of cases, of course,in whicha singleindividualplays
such a dominantrole in decision making,eitherin makingdecisionsforthe state
or in blockingchoices thatare not congruentwithhis or her own preferences,that
the application of a unitaryactor assumption and prospect theoryhypotheses
providesa reasonablygood explanationforstatedecisions.Saddam's Iraq, Hitler's
Germany,Stalin'sSovietUnion,and othercentralizedregimesare themostobvious
examples,but crisisdecision makingin less personalistregimescan also sometimes
be explained reasonablywell bya unitaryactormodel under certainconditions.
Althoughthe individual-levelfocusof prospecttheoryneed not be a problemin
applicationsto individualcases as long as thevalidityoftheunitaryactorassumption
is empiricallydemonstrated,and althoughthe unitaryactor assumptionhas been
as a general assumption
usefulforsome modeling purposes, it is less satisfactory
about foreignpolicy decision making.A theoreticalsolution to the aggregation
problem is clearly desirable. Rational choice theoryhas a similar aggregation
solved
problem,of course; and althoughrationalchoice has not yet satisfactorily
the problem,it has made some progresstowardthat end. Prospect theorylacks
anythingcomparable to rational theoriesof bureaucraticpoliticsto explain how
individual preferences,political power, and private informationget translated
throughthepoliticalprocessintochoicesforthestateor organization(Allison,1971;
Bendor and Hammond, 1992). Nor does prospecttheoryofferanythingcomparable to rational theories of coalition formationto explain how preferencesget
aggregated.There is nothingin principlethatexcludesus fromdevelopingprospect
theoryinto a theoryof collectivechoice, althoughthe roles of framingand of the
nonlinearprobabilityweightingfunctionintroduceadditionallayersof conceptual
and mathematicalcomplexity.
One problem is thatthe behaviorof groupswithrespectto riskychoices is not
necessarilycongruentwith the aggregationof the risk orientationsof individual

JACKS. LEVY

103

members,as demonstratedby the substantialbody of literaturein group dynamics

on "choice shifts."Early work emphasized the "riskyshift"phenomenon, the
tendencyforgroupsto favorriskierchoices thando the individualmembersof the
group (Pruitt,1971; Janis, 1982). More recent work tends to support a more
balanced "group polarization" hypothesis,in which groups tend to move either
towardriskieror morecautiouspolicyorientations,
dependingon thecircumstances
(Myersand Lamm, 1976; Minix,1982; 't Hart, 1991:264-6). One importantavenue
for futureresearch is to explore the extent to which the loss aversion and the
reflectioneffectapply to group decisions as well as it does to individualdecisions,
how the reflectioneffectinteractswithchoice shifthypotheses,and the extentto
whichtheseapply to foreignpolicybehavior.
Loss aversionand riskorientationboth depend on framing,of course,and this
presentsanother difficultset of analyticalissues for group decision making. In
individualcases where the applicationof a unitaryactorassumptionis reasonable
we can focuson the frameand decision calculus of the dominantdecision maker.
For the purposes of a general theoryof foreignpolicy,however,the concept of a
collectiveframearound whicha collectivevalue functionand collectiveprobability
weightingfunctionare constructedto generatea collectiveriskorientationinvolves
an unacceptable reificationof individual-levelconcepts.It is more usefulto focus
on the individuallevel and talk about how individualframesinfluenceindividual
evaluations of outcomes and orientationstoward risk to generate (along with
probabilityweighting)individual policy preferences.If a particularoutcome is
especiallycostlybecause it is seen as a loss relativeto a referencepoint,thereis no
reason whythatcannotbe incorporatedinto an actor'sutilityfunction.
Itwould also be usefulto explorehowtheframingofindividuals'referencepoints
is influencedby the referencepoints,preferences,and behaviorof othermembers
of the group (de Dreu, Carnevale, Emans, and van de Vliert,1994). There might
be severalcausal mechanismshere,butone ofthemostintriguinginvolvesstrategic
manipulationwithinthe group. At the same time individuals are framingand
be tryingto manipulate
reframingthe decisionstheyface,theymaysimultaneously
howothersframetheirchoice problems.In fact,partofthepoliticalbargainingmay
takeplace notdirectlyoverpolicypreferencesor even overcost-benefit
calculations,
butoverthereferencepointthatothersselectto frametheirproblems(Maoz, 1990).
One keyhypothesisis thatactorsaim to influencethe otherto framea particular
outcome as a foregonegain ratherthan as a loss in order to minimizethe coststo
othersof acceptingthatoutcome.37
This raises the interestingproblemthatthe relationshipbetweenframing(or at
least the frame that is articulated)and the evaluation of outcomes in collective
decision making may occasionally be reversed. Instead of the referencepoint
determiningwhetheroutcomes are defined as gains or losses, one's preexisting
policypreferencesmaylead one to frametheproblemarounda particularreference
point that is most likelyto influencethe preferencesof others. This creates a
problem for the analystin specifyingcausalityand in distinguishingreal frames
from strategicframes. Shafir (1992:314) argues that "it may not be trivialto
disentangle the choice of a frame from a choice of the alternativewhich that
particularframesupports."The relationshipbetweenframesand preferencesmay

37 This strategicaspect offramingapplies to domesticpoliticsas well as to bureaucraticpolitics,and partof leaders'

efforts
to gain the supportof domesticpublicslies in attemptingto influencethewaythesepublicsframethe issue.

104

ProspectTheory,Rational Choice

also be spurious,ifanothervariablesimultaneously
influencesan actor'spreferences
over outcomesand her selectionof a referencepoint (Jervis,1992).38
This discussionmakesitclearthatone critically
importanttaskforfutureresearch
involvesthe theoreticaldevelopmentand empiricalvalidationof linkagesbetween
loss aversion,the reflectioneffect,and framingeffectsat the individuallevel and
decisionmakingat the collectivelevel. Most usefulwould be the developmentof a
formaltheoryofcollectivechoicebased on themicrofoundations
ofprospecttheory.
This is an ambitioustheoreticaltask,but thereare otherthingsthatcan be done
short of this that would add to the utilityof prospect theoryfor international
relations.
One approach would be to incorporateframing,loss aversion,the reflection
effect,and the certaintyeffectintostandardmodels of bureaucraticpolitics.These
hypothesescould help to explain thesourcesofthepolicypreferencesofindividual
actors in the decision-makingprocess,while conventionalhypothesesabout the
nature of the bureaucraticprocess explain how these preferencesof different
individualsin different
roles and different
degrees of politicalinfluenceget aggregated to produce collectivepolicy choices. Heads of organizationsmay be more
concerned about maintainingtheir organizational power and budgets than in
increasingthem,forexample, and theymay treattemporarybudgetaryincreases
as a permanentpart of the organization'sendowment.
The same can be done for alternativemodels of the foreignpolicy process.
Domesticpublics,forexample, maybe more influencedbypolicies thathurttheir
standardoflivingthanthosethatimproveit,morebypoliciesthatharmthenational
interestthan those thatenhance it, and consequentlytheymay be more likelyto
punish political leaders for failuresthan to reward them for successes. In this
"two-levelgame" (Putnam,1988) withloss-aversepublicseven politicalleaderswho
were not themselvesinfluencedby loss aversionor framingwould findit in their
interestto behave as iftheywere.
In thesewaysthe loss aversionhypothesisand the reflectioneffectcan make an
importantcontributionto rationaltheoriesof politicsbyspecifying
both the shape
oftheutilityfunctionand theotherparametersthatare exogenous in thosemodels.
An alternativeapproach to theaggregationproblemwould focuson group dynamics. One hypothesismightbe that group settingslead to "compromisedframes,"
including"mixedframes"thatinvolveboth gainsand losses,thatare notas extreme
as individualframes(Shafir,1992:314).39One implicationis thatframechanges-and
consequentlyframing-induced
preferencereversals-willbe lowerin frequencyand
magnitude in group settingsas opposed to individualdecision making,but this
needs to be developed theoretically
and explored empirically.
Howeverit is done, some formof integrationofprospecttheoryhypothesesinto
broader models of the foreignpolicyprocess is a criticaltaskforfutureresearch,
forprospecttheoryas a theoryof individualchoice does not in itselfconstitutea
general theoryof foreignpolicy.
Problem
TheStrategic
Interaction

Justas it is necessaryto move froma theoryof individualchoice to a theoryof

collectivechoice in order to providea logicallycompletetheoryofforeignpolicy,it

38 It is conceivable,forexample, thata recentmilitary

defeatmightlead to theidentification
ofthe pre-defeatstatus
quo as the referencepoint and independentlycreate strongincentivesto pursue a hard-line,risk-acceptantforeign
policyto recoverone's losses and/orminimizethe reputationalcostsof thatdefeat.The inferencethatthe shifttoward
a more risk-acceptant
foreignpolicyfollowedfroma change in framemightbe spurious.
39 Recall thatframing-induced
preferencereversalsare weakerformixed lotteriesthanforpure lotteries.

JACKS.

LEVY

105

is also necessaryto move froma theoryof foreignpolicyto a theoryof interactive

choice to providea logicallycompletetheoryof internationalbehavior.Even more
here thanfortheaggregationproblem,prospecttheorylags behindrationalchoice
theory,which has supplementedexpected utilityas a theoryof choice withgame
theoryand bargainingtheoryas theoriesofstrategicinteraction(Roth,1985; Bueno
de Mesquita and Lalman, 1992; Morgan, 1994).
A major theoreticaltask for prospect theoryis to build a theoryof strategic
interactionon the assumptionsof referencedependence, loss aversion,the reflectioneffect,
and nonlinearresponsetoprobabilities.Such a "behavioralgame theory"
(Camerer, 1990), not yetdeveloped, would be to behavioraldecision theorywhat
game theoryis to formaldecision theory.This is a technicallydifficult
projectthat
mostinternationalrelationstheoristswillpreferto leave to economistsor economic
but thereare otherwaysthatprospecttheorycan be put in a more
psychologists,
strategiccontext.
Prospect theoryhypothesescan also be used to shape middle-rangetheories
about bargainingbehavior.The experimentaland behavioralliteratureon negotiationand bargainingtheory(Rubin and Brown,1975; Pruitt,1981; Roth, 1995)
contains a rich set of hypotheseswith importantimplicationsfor international
relations. The impact of framingon bargaining (Bazerman, 1983; Neale and
Bazerman, 1985; Neale, Huber,and Northcraft,
1987) is particularly
importantand
needs to be explored furtherin thecontextofinternationalpolitics.One important
hypothesisthatcould be furtherdeveloped relates to the concept of "concession
aversion"-if bargainerstreattheirconcessionsto the adversaryas losses and what
theyget in returnas gains,theywillovervaluethe formerrelativeto the latterand
be less inclinedto make concessionsor reach negotiatedsettlements
thanpredicted
by rationalchoice theoriesof bargaining(Neale and Bazerman, 1985; de Dreu et
al., 1994).
The framingof the referencepoint may affectthe bargainingprocess in other
ways. Are actors actuallyaware of framingeffects,and if so how much of the
bargainingprocessinvolvesattemptsto influencetheadversary'sframeand also the
adversary'sperceptionof one's own frame?Do politicalleaders attemptto make it
easier for the adversaryto make concessions by encouraging it to view those
concessionsas foregonegains ratherthanlosses?Do theytryto reinforcetheirown
bargainingpositionsbytryingto convincethe adversarythattheydefinetheirown
possible concessions as losses, thus increasingthe sense of loss and presumably
leavingone less inclinedto make furtherconcessionsand, in fact,more deserving
of additional compensation?What particulartacticsare used in attemptingto
manipulatethe adversary'sreferencepoint,and how successfulare they?Does the
framingof gains and losses influenceperceptionsof fairnessand justice, and how
importantare these considerationsin the bargainingprocess?
More generally,can we constructa behavioraland framingequivalentto "signaling games" in game theory(Powell, 1990; Fearon, 1994), in whichactorsattempt
not onlyto discoverthe adversary'spreferenceswhilemanipulatingtheadversary's
assumptions about their own preferences,but also to identifythe adversary's
referencepointwhile manipulatingthe adversary'sperceptionof theirown reference point?
Conclusions
The fact that prospect theoryis a leading alternativeto expected-utility
theory
undoubtedlyaccountsformuch of the interestin prospecttheoryin international
relationsand in politicalscience more generally.Prospecttheory,and, in fact,all
of behavioral decision theory,is defined in termsof behavioral deviationsfrom
expected-utilitytheory,and each of these theories is explicitlytested against

106

ProspectTheory,Rational Choice

expected-utility
theoryin experimentaland fieldresearch.This leads naturallyto
the viewof a paradigmaticdebate betweenprospecttheoryand rationalchoice.
In the sectionon externalvalidityI have emphasized the methodologicalproblems involvedin empiricallydifferentiating
a prospecttheoryexplanationfroma
rationalchoice explanationbased on expected-valuemaximization,and thisraises
the question of the criteriabywhichwe evaluate competingtheories.ElsewhereI
have argued thatexpected-utility
theoryis moreparsimoniousthanprospecttheory
because it is axiomaticallybased and because it requiresfewerparametersforfull
specification.Expected-utility
theoryis also based on a normativelyappealing set
of axioms, whereas prospect theorymakes no normative claims (Tverskyand
Kahneman,1986:S272).40On thesegroundsI argued thatin case studyapplications
of prospect theorythe burden of proof should be on the proponent of prospect
theoryto testher theoryor explanationagainsta rivalrationalchoice explanation
and to show not only that the evidence is consistentwith a prospect theory
explanation,but also thatthe theoryprovidesa betterexplanationofthatbehavior
than does a rationalchoice explanationbased on a straightforward
expected-value
calculation(Levy,1992b:296-7).
AlthoughI continueto believethatin the end empiricalapplicationsofprospect
theoryin internationalrelationsand politicalscience more generallywill have to
demonstratethatthe theoryprovidesa betterexplanationof a set of phenomena
than does an alternativerationalchoice theory,I believe thatmanyinternational
relationsanalystshave gone too farin definingtheirtaskin termsofa paradigmatic
debate betweenprospecttheoryand rationalchoice. I also believe thatgiven the
earlystagesin the developmentand applicationofprospecttheoryin international
relations,it is prematureto focus primarilyon empirical testsbetween the two
paradigms.
Firstof all, too much scholarshipin the internationalrelationsfieldhas focused
primarilyon interparadigmaticdebates at the highestlevel rather than on the
constructionand testingof falsifiablemodels of behavior. The rational choice
theoriesofinternationalpolitics
paradigm4lsubsumesa numberofratherdifferent
(derivingin part fromthe incorporationof different
auxiliaryassumptionsabout
preferences),and a focuson the paradigmaticdebate betweenprospecttheoryand
rationalchoice obscuresthese significanttheoreticaldifferences.In the same way,
theoretical
paradigmaticdebatesbetweenrealismand liberalismobscuresignificant
variationswithineach (Levy,1994), and the furtherconceptualdevelopmentofthe
theoriesof interprospecttheoryresearchprogramis likelyto generatedifferent
nationalpolitics.Interparadigmaticdebates deflectattentionawayfromtheimportant tasks of empiricallytestingbetween alternativetheories within the same
theoreticalperspectives
paradigm and of consideringhow insightsfromdifferent
mightbe combinedto generatemore powerfultheoriesof behavior.
Anotherreason whyinternationalrelationsscholarsshould not focusprimarily
on the paradigmaticquestionofwhetherprospecttheoryprovidesa betterexplanationofinternationalpoliticalbehaviorthandoes rationalchoice/expected-utility
theoryis methodological:itis extremely
unlikelythatempiricaldata in international
politicswill provide a convincingtestof these competingtheoriesof choice. It is
to operationalizeand measure the keyvariablesand to control
simplytoo difficult
40 That is, actorswho wereaware thattheywerebehavingaccordingto the dictatesofexpected-utility
theorywould
have no incentivesto altertheirbehavior,whereasactorswho wereaware thattheirbehaviormatchedprospecttheoi-y
mightwanitto altertheirbehavior.
41 It is more usefulto conceptualizerationalchoice as a paradigm or a researchprogram-or perhaps as a "family
oftheories"or a "fieldofendeavor"(Green and Shapiro, 1994:28-30; Ferejohnand Satz, 1995:81)-than as a "theory"
ofbehavior.

JACKS.

LEVY

107

for confoundingvariables. It is betterto leave that task to the experimentalists,

whererigorousmeasurementand controlare possible,and to empiricalinvestigators in fields such as consumereconomics or investmentor insurancebehavior,
where the key theoreticalconcepts are more easily scaled into somethingthat
approximatesa utilityfunction.
In fact,thereis no reasonwhyinternationalrelationstheoristsshouldnotexplore
prospecttheory-relatedhypothesesthroughexperimentalmethods. Existingexperimentalworkbypsychologists
focuseson individualchoice outsideofa political
or strategiccontext,which limitsits utilityforan understandingof international
behavior. Experimentson group behavior and on interactivestrategicbehavior
would be particularlyuseful.42Of course, the question of the "realism" of the
experimentsand whetherthepenaltiesforsuboptimalbehaviorregardingissuesof
peace and war can be adequately simulated in the experimentallaboratorywill
remainan importanttopic forfuturedebate.
It is also prematureon theoreticalgroundsto focustoo muchon designingcritical
empiricaltestsof prospecttheorybeforetheoriesof internationalbehaviorbased
on the microfoundations
of prospecttheoryare more fullydeveloped. The power
oftherationalchoice paradigmdoes notrestprimarilyon theextentofitsempirical
collaboration,certainlynot at the individuallevel,butratherin itsanalyticalpower
to generatean elaboratesystemofinterconnectedtheoriesand testablehypotheses
about a wide range ofhuman behavior,to specifythe causal mechanismat the core
of thesehypotheses,and to generatenewresearchquestions.43The rationalchoice
programhas generatedsocial choice theory,spatial theory,and game theory,and
these have been applied to a varietyof more specific substantivedomains in
internationalrelations,including,among others,alliance formation,deterrence,
bargaining,and crisisdecision making.
Prospecttheory,at thispoint,has not generateda comparable set of theoriesor
hypothesesabout social behaviorin generalor internationalbehaviorin particular.
The heuristicpotential of the theoryfor generatingan interconnectedset of
propositionsabout internationalpoliticsis there,butithas yettobe fullydeveloped.
A centraltaskforfutureresearchon prospecttheoryis to go beyondthehypotheses
of loss aversion, referencedependence, and the reflectioneffectto develop a
broader theoreticalstructure,an expanded set of testablehypothesesabout international relations.The specificationof how the individual-levelpatternscan be
integratedinto theoriesof foreignpolicy and strategicinteractionis particularly
important.We need to constructprospecttheory-basedtheoriesof scapegoating,
bureaucraticpolitics,deterrence,bargaining,and numerous other phenomena.
Once these theories are constructedwe can then test some of their theoretical
implications(ratherthantheirpriorassumptions)againstthe evidenceand against
alternativetheories.
Stillanotherreason not to focusprimarilyon the paradigmaticdebate between
prospect theoryand rational choice relates to the above-mentionedsimilarities
betweenexpected-utility
theoryand rationalchoice. I have emphasized thatsome
of the behavioralpatternsupon whichprospecttheoryis based are not necessarily
inconsistentwithexpected-utility
theoryor rationalchoice. An importanttaskfor
futureresearchwould be to explore how loss aversion,the reflectioneffect,and
perhaps nonlinearresponse to probabilitiesand referencedependence mightbe

42 One example might be the Morgan and Wilson (1989) experimentaltest of a spatial bargaining model of
interinational
conflict.
43' This parallelsthecriticisms
on thegroundsthat
ofGreen and Shapiro's (1994) Pathologies
ofRationalChoiceThleory
it gives too much emphasis to the criterionof empiricalconfirmationor explanatoiysuccess and not enough to the
specificationofcausal mechanismsthatexplain behavior-(Ferejohn and Satz, 1995; Chong, 1996).

108

Prospect
Thieory,
RationalChoice

incorporatedinto rationalchoice theoriesor othertheoriesof foreignpolicyand

internationalpolitics.Can we build bettertheoriesofbureaucraticpoliticsbyusing
lossaversiontohelp specifythepreferencesofindividualactors?Can we incorporate
loss aversionand the reflectioneffectinto theoriesof bargaining-and thus give
greaterempiricalcontentto theshape oftheutilityfunction-ina waythatenhances
the descriptiveaccuracyof those theorieswithoutunderminingtheir axiomatic
base?44 In otherwords,we mightshiftsome of our attentionawayfromprospect
or empirical regularities
theoryas a whole and toward some of the hypotheses
associated withit, and ask how these hypothesesmightbe incorporatedinto our
existingtheoriesof internationalrelations.
Prospecttheoryand the descriptivefindingsupon whichit is based have led us
to ask some novel and importantquestionsabout politicalbehavior,questionsthat
are often ignored by rational choice approaches. We may ultimatelyfind that
prospecttheoryis more usefulthan rationalchoice theoriesformanytheoretical
purposes in internationalrelations.Or, we may findthatrationalchoice theories
provide more analyticallypowerfulexplanationsof phenomena that involveloss
aversion,the reflectioneffect,and related patterns.Regardless of the outcome,
prospect theoryand its associated experimentalfindingshave already made a
significant
contributionto theinternationalrelationsliteraturebyputtinga new set
ofquestionson theagenda and forcingall theoreticalapproaches to deal withthem.
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