Prospect Theory, Rational Choice, and International Relations

Abstract

A half-decade after the first systematic applications of prospect theory to international relations, scholars continue to debate its potential utility as a theoretical framework. Key questions include the validity of the experimental findings themselves, their relevance for real-world international behavior that involves high-stakes decisions by collective actors in interactive settings, and the conceptual status of prospect theory with respect to rational choice. In this essay I assess theoretical and methodological debates over these issues. I review work in social psychology and experimental economics and conclude that challenges to the external validity of prospect theory-based hypotheses for international behavior are much more serious than challenges to their internal validity. I emphasize the similarities between prospect theory and expected-utility theory, argue that hypotheses regarding loss aversion and the reflection effect are easily subsumed within the latter, and that evidence of framing effects and nonlinear responses to probabilities are more problematic for the theory. I conclude that priorities for future research include the construction of hypotheses on the framing of foreign policy decisions and research designs for testing them; the incorporation of framing, loss aversion, and the reflection effect into theories of collective and interactive decision making; and experimental research that is sensitive to the political and strategic context of foreign policy decision making.