Prospect Theory and International Relations: Theoretical Applications and Analytical Problems

In this essay I evaluate the potential contribution of prospect theory to our understanding of international relations. I begin with the implications of loss aversion, the endowment effect, risk orientation, and framing for theoretical questions relating to the stability of the status quo in international politics, deterrence, bargaining, and preventive war. I then raise conceptual and methodological problems which complicate the theoretical and empirical application of prospect theory to international behavior. I illustrate my arguments with references to some recent attempts to use a prospect theory framework to guide case studies of crises decision-making. I conclude that in applying prospect theory to empirical cases, the analyst must demonstrate not only that empirical behavior is consistent with the theory but also that the observed behavior cannot adequately be explained by a rational choice model which posits the maximization of expected value.

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