Jack S. Levy Applications of Prospect Theory to Political Science

Prospect theory is an alternative theory of choice under conditions of risk, and deviates from expected utility theory by positing that people evaluate choices with respect to gains and losses from a reference point. They tend to overweight losses with respect to comparable gains and engage in risk-averse behavior with respect to gains and risk-acceptant behavior with respect to losses. They also respond to probabilities in a nonlinear manner. I begin with an overview of prospect theory and some of the evidence upon which it is based, and then consider some of the implications of the theory for American politics, international relations, and the law. I end with a brief discussion of some of the conceptual and methodological problems confronting the application of prospect theory to the study of politics. Rational choice theories based on expected-utility models of decisionmaking have come to play an increasingly important role in political science over the last two decades, to the point that the debate between rational choice theorists and their critics now constitutes one of the central themes in the theoretical literature on American, comparative, and international politics. While cultural and constructivist critics of rational choice question its choice-theoretic foundations, behavioral decision theorists accept those basic foundations but question whether expected utility provides an adequate descriptive theory of how people actually make choices under conditions of risk and uncertainty. Although the debate among contending theories of risky choice has yet to be resolved by social psychologists and experimental economists (Battalio et al. 1990; Sopher and Gigliotti 1993; Camerer 1995; Kagel and Roth 1995; Kahneman and Tversky 2000), the behavioral alternative to expected utility that has received by far the most attention in political science is prospect theory (Kahneman and Tversky 1979). Prospect theory deviates from expected-utility theory by positing that the way people frame a problem around a reference point has a critical influence on their choices, and that people tend to overweight losses with respect to comparable gains, engage in risk-averse behavior with respect to gains and risk-acceptant behavior with respect to losses, and respond to probabilities in a non-linear manner. Prospect theory has been particularly influential in the field of international relations, but scholars in other fields of political science have also begun to apply some of the theory’s key concepts.1 Synthese 135: 215–241, 2003. © 2003 Kluwer Academic Publishers. Printed in the Netherlands.