Show Summary Details

Page of

PRINTED FROM the OXFORD RESEARCH ENCYCLOPEDIA, POLITICS ( (c) Oxford University Press USA, 2016. All Rights Reserved. Personal use only; commercial use is strictly prohibited. Please see applicable Privacy Policy and Legal Notice (for details see Privacy Policy and Legal Notice).

Subscriber: null; date: 16 October 2018

Prospect Theory in International Relations

Summary and Keywords

Analysis of the use of prospect theory since the mid-1980s identifies significant impact on research on important puzzles in international security and international political economy. Research since the mid-1990s has identified the scope conditions of framing effects, loss aversion, and patterns of probability estimation on international behavior. New research using multiple methods has strengthened the validity of findings on the impact of framing effects and loss aversion under different conditions. Future research opportunities for psychological explanations of international behavior are identified.

Keywords: prospect theory, framing effects, loss aversion, probability estimation, endowment effect, deterrence, compellence, trade, investment treaties, aggregation, empirical international relations theory

Rational Choice as the Default

In both international security and international political economy, rational choice has been the predominant explanation of puzzling behavior for several decades. Its preeminence is not surprising; there are several normative, epistemological, and sociological reasons for its near hegemony in the field of international politics. First, rational choice provides a normative baseline for evaluating choice. It also provides clear epistemological benefits: it generates a broad set of expectations, even when analysts have to establish the content of preferences with evidence and methods drawn from outside the model, and a productive research agenda. Third, political science, more so than the other social sciences, has long been heavily influenced by theoretical approaches drawn from economics. Political scientists have been consumers of approaches developed in economics, usually with a lag of several years. Approaches drawn from economics, which has enjoyed extraordinary legitimacy as a “rigorous” and “parsimonious” discipline that employs deductive theories, have been influential among political scientists and scholars of international relations. Rational choice, in other words, provided a powerful normative bulwark against both the uncertainties and the complexities that shape the parameters of most of the important problems in international politics, generated a productive research agenda, and was sociologically legitimate. These are considerable advantages in the discipline of international relations that does not yet have and may never have a unified field theory.

Over the last several decades, however, evidence has mounted both in psychology and in economics that has successfully challenged the descriptive accuracy of theories of rational choice. In recent years, there has been an explosion of interest in psychology by economists studying individual choice. Drawing on three decades of work in psychology, economists in significant numbers moved into the laboratory to examine the impact of biases in judgment on consumer choices and on a wide range of responses to public policies. Behavioral economists encouraged their colleagues to test their propositions on evidence drawn from experimental settings rather than relying on deductive axioms. Experimental research in both disciplines has focused on the impact of framing effects and loss aversion, the consistently poor estimation of probabilities, distortions in information processing, the tendency to reduce uncertainty and seek consistency in inconsistent information, and the impact of overconfidence on patterns of inference and on the accuracy of forecasts. As experimental evidence has cumulated, economists are now grappling with the poor fit of deductive theories of rational choice with the evidence. The disconnect has been especially important in the field of microeconomics where explanations of unit choices are fundamental.

Prospect theory, first proposed in 1979, has expanded to include a cluster of scholarship in psychology and behavioral economics that encompasses research on framing effects, loss aversion and patterns of probability estimation. Since the mid-1990s, prospect theory and the research that flowed from it have been widely used by behavioral economists and, increasingly, by scholars in international relations to explain anomalies in international behavior. Scholars in international relations have also identified a set of scope conditions that amplify or minimize loss aversion and its associated biases. (Kuhberger, 1998; Levin et al., 1998; Mandel, 2001; Schweitzer & DeChurch, 2001; Boettcher, 2004). Although significant progress has been made, the challenges of aggregating from the laboratory to state behavior and from the individual to the collective level remain.

Prospect Theory: Moving Outside the Laboratory

Prospect theory is considered to be the best description of how people evaluate risk in experimental settings (Kahneman & Tversky, 1979, 1984; Tversky & Kahneman, 1981, 1992). Its four central elements are well known: reference dependence, loss aversion, diminishing sensitivity, and probability weighting. In a series of experiments, Kahneman & Tversky demonstrated that people’s choices among prospects are shaped by “framing effects,” the method or sequence of the presentation of options. The variance of preferences as a function of presentation violates one of the most fundamental assumptions of rational choice theories.

In their experiments, Kahneman & Tversky structured problems around a reference point. Their results demonstrated that people considered relative gains and losses from that reference point rather than estimate the net expected value of their assets, as rational choice theories expect, and that change is felt more strongly closer to the reference point. Reference dependence is of profound importance in the explanation of strategic choice and interaction.

Kahneman & Tversky also demonstrated the significance of loss aversion, an asymmetrical weighting of loss where loss is far more painful than equivalent gain is pleasurable; the value function is concave in the region of gains but convex in the region of losses. Incorporating loss aversion into decision models produces results in the explanation of decisions in international security and international political economy that, under certain conditions, are inconsistent with the results expected by theories of rational choice.

The impact of loss aversion is amplified by systematic distortions in the weighting of probabilities. Assessment of risk becomes skewed when outcome probabilities are very high or very low. Depending on their reference points, individuals tend to either to overweight or underweight these kinds of probabilities (Tversky & Kahneman, 1992; Cameron & Ho, 1994; Gonzalez & Wu, 1999; Abdellaoui, 2000; Bruhin, Fehr-Duda & Epper, 2010). In a set of experiments, Kahneman & Tversky find a distinctive fourfold pattern of attitudes to risk: risk-aversion for gains and risk-acceptance for losses of high probability and risk-seeking for gains and risk-aversion for losses of low probability (Kahneman & Tversky, 1984, p. 345; Tversky & Kahneman, 1992; Schaub, 2004, p. 399; Elms, 2008, p. 247).

Risk propensity is a function of the initial reference point a decision maker chooses, but once that reference point is known, risk becomes a situational as well as a dispositional attribute which makes it especially suitable to the analysis of problems in international security and international political economy. The explanatory punch comes not only from individual differences among decision makers but also from the situation.

Four issues arise when prospect theory moves outside the lab to the analysis of decision making in international politics. First, economists and psychologists provide the frame in their experiments and then study the impact; in international politics the frame is not given and the theory provides only a partial account of framing through theories of “mental accounting.” Mental accounting, one among several theoretical explanations of reference point shifts, is “the set of rules people use to choose reference points and categories for comparing various gains and losses” (Thaler, 1985; Camerer & Kunreuther, 1989, p. 573). These rules often violate the rules of economic decision making. Other things being equal, people prefer the status quo because of the endowment effect (Knetsch & Sinden, 1984; Thaler, 1985).

The absence of a strong theory of framing has made it difficult to know how to test its propositions outside the lab. In the last decade, economists have addressed that challenge by deriving the predictions of prospect theory under a variety of plausible definitions of gains and losses and testing these predictions across different domains (Barberis, 2012). Koszegi and Rabin consider that the reference point people use to compute relative gains and losses is their expectation or “beliefs … held in the past about outcomes” (2006, 2007, 2009). They propose that people derive utility from the difference between consumption and expected consumption.

Second, reference points must be defined ex ante, independently of outcomes, to properly test theories. Taliafero suggests that a rigorous test of prospect theory requires three observations: (a) decision makers evaluated outcomes in terms of the reference point adopted at t; (b) decision makers perceive themselves as facing gains or losses relative to that reference point at t + n; and (c) the group’s risk-taking behavior is in the predicted direction (Taliafero, 1998, p. 109; Davis, 2000; McDermott, 2004a).

Third, risk has emotional as well as probability dimensions (Loewenstein et al., 2001, p. 267; Slovic et al., 2004; Mercer 2005a, 2010; Carnevale, 2008; Kahneman, 2011, pp. 326–237; Hall & Ross, 2015). Emotion influences the choice of reference points and processes of probability estimation. Risks that are particularly vivid or salient are systematically overestimated. Emotion also influences loss aversion directly. People feel the pain of loss more intensely than they feel the pleasure of gain and are more likely to take risks to recover a loss and less likely to see concessions as compensating for the injury when emotion inflates the loss and feelings of injury (McDermott, 2004b, 2009).

Finally, even though risk is situational as well as individual, there is still too little systematic work either in psychology or behavioral economics on the impact of group dynamics on framing and choice. Prospect theory, developed in the lab, paid little attention to the scope conditions that would shape its impact outside (Boettcher, 2004).

Prospect Theory and International Security

Prospect theory has been used to explain decision making behavior during crises. Early case studies, using archival material, memoirs, interviews and comparative case studies, demonstrated the counter-intuitive impact of loss aversion on deterrence strategy and examined its implication for deterrence theory (Stein, 1985). Farnham explained President Roosevelt’s response to the Munich crisis and McDermott compared the decision making of Prime Minister Eden in Suez in 1956 and President Carter during the hostage crisis (Farnham, 1992, 1997; McDermott, 1998, 2004a). That early research met strong resistance from rational choice theorists who challenged the validity of the inferences that contradicted those of deductive theories of deterrence and disputed the impact of single case studies. Part of the resistance was sociological, likely a function of the then unchallenged dominance of rational choice in economics.

Since the mid-1990s, however, scholars have devoted significant attention to the scope conditions of prospect theory. Building on the central arguments of prospect theory, researchers have used several approaches to test the impact of loss aversion on the outcome of deterrence strategy. The first uses careful process tracing to first identify the reference point of decision makers ex ante, then establishes the gains and losses that decision makers perceive themselves facing relative to that reference point, and then assesses whether decision makers’ behavior is as predicted (Stein, 1985). This approach judges the relative asset position of would-be challengers in comparison to a fixed interval of time in the past and derives frames from these relative assessments.

A second promising approach uses the hedonic tone of the problem to suggest an obvious or natural frame (Kuhberger, 1998; Mandel, 2001). Analysts then assess the material consequences of policy choices as gains when challengers are likely to judge that they are doing well and as losses when they feel that they are likely to do poorly. This approach is consistent with those used currently by behavioral economists. Both these formulations test the impact of loss aversion on challenges to deterrence and find support for the proposition that loss aversion promotes challenges to deterrence that are not expected by rational choice theorists (Berejikian, 2004; Mercer, 2005b).

Prospect theory also helps to explain the conditions that favor deterrence over compellence. Behavioral economists have identified the endowment effect that leads people to overvalue what they currently possess and therefore exaggerate the cost and losses of concessions (Thaler, 1985; Jervis, 1992; Goldgeier & Tetlock, 2001). The endowment effect amplifies loss aversion in the context of compellence. Other things being equal, the endowment effect makes it more difficult for leaders to give up something that they already possess than to prevent them from taking something they do not currently have.

Experimental research has demonstrated that the strength of framing effects varies across conditions. Framing effects vary by domain. Kuhberger identifies a wide range of framing effects that vary across domains: medical diagnoses, betting, the escalation of commitment, by the information contained in the prospects presented to decision makers, by the descriptors associated with particular outcomes, and by the outcome probabilities (Kuhberger, 1998; Levin, Schneider, & Gaeth, 1998; Mandel, 2001, p. 71; Boettcher, 2004).

The tendency toward risk seeking is greater in human life problems than in money problems (Mandel, 2001). Prospect theory is more likely to be relevant, therefore, to decisions about war than it is to decisions about finance (Kanner, 2004; Carnevale, 2008; McDermott, 2009). When their survival or the survival of those they represent is not assured, decision makers are especially likely to be risk acceptant. In modeling outcomes of crisis bargaining, when decision makers are risk averse or risk neutral, the predictions of rational choice and prospect theory are likely to converge. They are likely to diverge, however, when one or more set of leaders are risk acceptant because they feel that their survival is at stake. Both domain and individual heterogeneity matter (Schaub, 2004; McDermott, Fowler, & Smirnov, 2008, p. 345).

Missing information, a common attribute of problems in international security, also enhances framing effects (Kuhberger, 1998; Mandel, 2001, p. 60). Outcome probabilities also affect the strength of framing effects: certain and risky bimodal choices produce greater effects than choices between two risky options. Prospect theory deals only with the framing effects of utility-equivalent choices. People accept risk more easily when they frame options so that a risky gamble entails the possibility, however unlikely, of avoiding a losing outcome. Scholars have argued that decision makers choose the risky option of war now because they wanted to avoid an even riskier option of a war under unfavorable conditions later (Snyder, 1978). Leaders are more risk averse if they frame options so that one promises potential gains and the other has a probability, however low, of a losing outcome (Kuhberger, 1998, p. 36; Boettcher, 2004, p. 338). A certain and risky option set, combined with the endowment effect, helps to explain the conditions that favor the success of deterrence over compellence.

Research in international security in the 2000s shows a widespread recognition in academic analyses of the impact of loss aversion on important puzzles. This work has been helpful in explaining variation in arms reduction strategies, the outcomes of negotiation, deterrence failures and, more broadly variation in strategic choices, as well as the policy dilemmas that ensue (Fuhrmann & Early, 2008; Stein, 2018). A sharp turn in official U.S. policy to “tailored deterrence” explicitly recognized the importance of loss aversion and psychological concepts more generally in crafting deterrence strategies (USSTRATCOM, 2006).

Experimental analyses of the impact of loss aversion are also reshaping the understanding of bargaining failures and war when leaders are neither risk averse nor risk neutral (Kanner, 2004; Carnevale, 2008; McDermott, 2009). When their survival or the survival of those they represent is not assured, decision makers are especially likely to be risk acceptant; their predisposition to risk is in large part a function of the context of the conflict. More robust models of international conflict, McDermott, Fowler, & Smirnov conclude, should be based not only on the individual characteristics of the decision maker but also on the context of the conflict. “One of the insights provided by prospect theory highlights the central influence of the situation on the risk propensity of any given leader. The interpretation and perception of that environment may differ across individual leaders (i.e., the point at which he understands his survival to be at risk), but the importance of such variables on choice remains critical and constant” (McDermott, Fowler, & Smirnov, 2008, p. 345; see also Schaub, 2004).

Prospect Theory and International Political Economy

Until the mid-2000s, scholars working in international political economy were less inclined to draw on foundational concepts in psychology and behavioral economics even though, paradoxically, the subject matters are more closely connected. They were more reluctant in part because they tended to think that individual departures from rationality would “wash out” in the large number of interactions that characterize global markets (Elms, 2008).

These arguments do not hold up well. Psychology has demonstrated a systematic rather than random pattern of deviations from rational choice. If the errors are random, they are likely to cancel one another out over time in large markets. If they are systematic, however, they are likely to amplify and produce large shifts or herd behavior as investors or consumers move together in large clumps (Akerlof & Yellen, 1985; Haltiwanger & Waldman, 1985; Russell & Thaler, 1985). It is no accident, for example, that investors tend to sell low and buy high as markets move up and down. Mistakes of individual investors do not cancel themselves out but amplify one another to accelerate crises in tightly interconnected global markets (Shiller, 2003; Stein, 2012).

Second, international political economists deal not only with large numbers in markets, but with small numbers of states, alliances, coalitions, and institutions, both domestic and international, as do their colleagues in international security. Leaders of institutional actors in the global economy are no less likely than others to fall victim to overconfidence, myopic time horizons, and flawed estimates of probabilities, biases that are systematic and predictable within established scope conditions. They are also poorly equipped, for cognitive as well as institutional reasons, to deal with the low-probability, high-value “black swan” events that generate crises (Camerer & Kunreuther, 1989; Taleb, 2007).

Since the mid-2000s, scholars have worked widely with framing and prospect theory to examine a broad range of problems in international political economy. A shift in framing explained a change in debates over elements of Trade-Related Aspects of Intellectual Property (TRIPS) in the World Trade Organization (Sell & Prakash, 2004). Prospect theory was also used to test the proposition that policy makers are less likely to back down in trade disputes where they seek to minimize losses than they are in disputes where they are seeking to maximize expected gains. Using data from 100 cases of trade disputes initiated by the United States in a large-N study, Berejikian & Early find strong support for an explanation of loss aversion (2013). Drawing on the tendency of decision makers to underweight low probability events, Poulsen & Aisbett find that leaders in developing countries tended to ignore the risks of bilateral investment treaties until they themselves became subject to an investment treaty claim (2013). Risk acceptance has also provided a compelling explanation of the pace and timing of domestic economic reforms in Latin American states (Weyland, 1996, 2002). Leaders in Argentina, Brazil, and Peru who confronted economic crises chose risky and costly reform strategies, whereas Chile’s leaders, who faced better economic conditions, chose more cautious strategies. In an intriguing and elegant analysis, Deborah Elms examines papers dealing with puzzles in international political economy and then uses prospect theory to reinterpret their findings in more generalizable and robust ways (Elms, 2008).

The widespread application of the cluster of framing effects, loss aversion, and systematic biases in probability estimation demonstrates the rich diffusion of prospect theory and the follow-up research it generated across a wide variety of puzzles in both international security and international political economy. Moving experimental results from highly structured problems in the lab to ill-structured problems in international politics is, however, a bumpy process. There is still no consensus on how to theorize reference points. Complex multidimensional choices, the need to construct options, and imperfect information make the transfer out of the lab difficult.

Yet progress in testing alternative theories of framing has been significant, in microeconomics as well as in international security and international political economy (Barberis, 2012). Scholars have developed alternative formulations of these challenges and, working with a range of methodologies from large-N studies to archival case studies to an increasing emphasis on experiments both in the laboratory and the field, are using prospect theory to explain a large number of puzzles. Especially important has been the deepening knowledge about the scope conditions, both situational and individual, for the selection of reference points and the thresholds of framing effects. Experiments have demonstrated that domain, missing information, outcome descriptors, outcome probabilities, and individual differences in emotion, identities, experience, and risk preferences can shift the selection of reference points and the impact of framing effects in systematic ways. Emotion may also shift the direction of a reference point; experimental results suggest that positive affect can shift reference points to induce a downsizing of loss differences and an upsizing of gain differences and away from the individual to the collective (Carnevale, 2008, p. 59, 61). Individual differences matter in explaining cooperative behavior as well. Pro-social people are more cooperative in a loss frame, whereas pro-self people are more cooperative in a gain rather than a loss frame (De Dreu & McCusker, 1997). Identification of these scope conditions, encompassing both situational and individual differences, and of threshold effects helps to establish when individuals are likely to behave as psychological theories predict and when they are more likely to approximate rational choosers.

Aggregation and Disaggregation

Psychologists—and behavioral economists—are methodological individualists. They both draw largely on experimental evidence generated in the laboratory about the ways individuals make choices under controlled conditions and develop and refine explanations through repeated experimentation. In cognitive psychology and microeconomics, explanations generally remain at the level of the individual and the problem of inference goes away. Not so in the analysis of international behavior, where the fundamental unit of analysis tends to be the state, international institutions, or the system as a whole. But theoretical propositions drawn from individual-level analysis do not move easily to higher-level units such as states. This challenge of aggregation limits the diffusion of psychological explanations of international behavior.

Psychological explanations of international behavior are not alone, however, in facing the challenge of aggregation. Theorists of rational choice continue to assume, despite the now overwhelmingly contradictory empirically evidence, that the state is a unitary rational actor. Although they use largely deductive models that make standard assumptions about the preferences and decision making processes of aggregate actors and do not depend therefore on evidence drawn from the study of individual behavior, their models are nevertheless inherently formulated at an individual level when they treat states as unitary actors. Individuals estimate probabilities, not states, and individuals calculate utilities, not states. States cannot think, estimate or calculate, only their leaders can. Yet rational choice theorists routinely assume a unitary decision maker and go up the ladder of analysis and attribute these properties to the state. “Russia” calculates the best option available in Syria and the “United States” seeks to maximize its interests in the Middle East.

Scholars make the assumption that leaders are “rational” in part because they can draw on large bureaucracies that can produce a thorough appraisal of different courses of action given a set of assumptions. This argument gives insufficient weight to crisis conditions that can attenuate the role of bureaucratic appraisal, especially when time is short and emotions run high. Even in more routine situations, this kind of argument ignores the biases that senior bureaucrats may have, the impact of the way they frame options on the choices decision makers make, and the political and institutional interests that bureaucrats must frequently negotiate.

In treating states as rational actors, rational choice theorists assume that the impact of psychological processes is small and can be easily managed through standard “as if” assumptions. Yet the evidence increasingly suggests that the impact of these processes is large, that it varies across individuals and conditions, and that under certain conditions, it is strong enough not only to affect but even to reverse preferences. In short, theorists of rational choice suffer from the same underlying paradoxes of inference as do their colleagues in psychology and behavioral economics. The challenges of aggregation and disaggregation should not count as a meaningful constraint in one part of the field and not in others.

Second, some scholars of international relations are paying explicit attention to when and how cognitive biases are amplified or diminished in collective settings. It is important to specify how individual heterogeneity is aggregated into collective choice. In a group context, choice shifts are specific cases of the more general phenomenon of group polarization where group discussion leads to adoption of a more extreme position than the group average in the initially preferred direction (Isenberg, 1986, pp. 1142–1145; Boettcher, 2004, p. 335). Drawing on theories of social contagion, social comparison, and persuasive arguments, scholars have specified how individual biases are modified or exaggerated by participation in different kinds of collective settings (t’Hart et al., 1997; Tajfel, 1982; Tajfel & Turner, 1986; Shiller, 2003; Hafner-Burton et al., 2013; Hall & Ross, 2015).

Theories of social contagion expect that information, evaluation, and affect circulate among members of a group, building upon the fertile ground of the “group within the individual” to forge loyalty and consensus. Social comparison explanations of aggregation assume that individuals are motivated to present themselves as socially desirable and these processes of amplification become mutually reinforcing within the group. The average at the end of the group process has shifted toward a more extreme collective choice (Isenberg, 1986, pp. 1142–1145; Boettcher, 2004, p. 335). Theories of persuasive arguments emphasize the validity and novelty of the content of argument as two factors that shift individual choices in a group; novel arguments that are valid are especially persuasive (Isenberg, 1986, p. 1145; Boettcher, 2004, p. 335). Rather than ignore these processes in the name of parsimony and assign individual-level attributes to states, as rational choice theorists suggest, social and political psychologists are modelling alternative formulations of the impact of aggregation processes on shifts in both the direction and magnitude of choice.

Prospect Theory and Puzzles in International Relations

Scholars in international relations now have better opportunities than they have ever had to design and execute experimental studies. Social psychologists have long worked with colleagues in international politics on experimental studies, but they were restricted to the lab, relied almost exclusively on students, and were very few in number. Experimental studies that build on digital platforms will make larger number of subjects easier to access and allow direct assessments of “interventions” as well as tighter control of confounding variables than other kinds of methodologies that scholars of international relations use. There are now more robust tests of prospect theory across a wide variety of problems in international relations.

Nevertheless, an important caveat is in order. The internal validity of the results from well-designed experiments tends to be high, but their external validity is more challenging. There is good reason to be careful about the inferences that are drawn from experimental studies; much depends on the context and the puzzle. Generally these experiments draw on publics or carefully selected subsets of former officials. When scholars are assessing the impact of beliefs and information processes on voter preferences toward international issues, there is every reason to be confident of the external validity of the results of carefully designed experiments where participants represent the broader population. The challenge comes in drawing inferences from these kinds of experiments to the behavior of leaders. Tetlock & Gardner have shown that experience can profoundly influence judgment and in this context differences among leaders, officials, and mass publics are significant (Tetlock & Gardner, 2015). There is considerable variation, for example, in the level of expertise among and across officials and leaders in any administration (Saunders, 2017). Just as psychologists have had to be careful not to claim too much validity from experiments with undergraduate students, scholars of international politics must be careful about the claims they make about leaders’ behavior based on experiments with students or undifferentiated publics. Field studies with experienced decision makers are important to validate generalizations from laboratory experiments. It is worth noting that scholars are now using large-N studies to test prospect theory on leaders’ behavior. Multiple streams of evidence will help to refine these theories about the impact of psychological concepts on international behavior.

Behavioral economists have also had unusual success in reaching beyond the lab to reshape public policy. Governments of the United States and the United Kingdom have both institutionalized offices for behavioral economists to advise on policy implementation and improving access to government services. In the United States, behavioral economists who worked in the Obama administration focused on making public services more cost-effective and easier to use. Thaler and Sunstein (2009) have had success in increasing people’s investments in retirement savings accounts through “nudge” strategies that changed payroll default options. In the United Kingdom, the Behavioural Insights Team tests and scales ideas from behavioral economics. Similar impact is evident in the field of international security. The United States initiated an important shift to “tailored” deterrence strategies that drew on prospect theory, particularly research on loss aversion, to “get into the heads” of adversaries. Official documents make clear that U.S. strategy modified traditional rational choice models of deterrence to incorporate loss aversion into the design of strategy (USTRATCOMM, DO JOC, 2006, p. 21; Levy, 1992a, 1992b; Farnham, 1994).

Policy makers now are far more open to the results of research in behavioral economics than they were in the 1980s to the research of scholars in international relations that drew on psychological concepts. Policy and academic scholarship often have a synergistic relationship. The advent of nuclear weapons immediately after World War II spurred early work on rational theories of deterrence that was enormously influential in shaping strategy. Research on the outcomes of strategies of deterrence then fueled successive waves of scholarship on deterrence theory. The impact of psychology and behavioral economics on the analysis of puzzles in international politics is similarly likely to be amplified by their growing impact on strategy and the policy research that will be done to measure their impact. This research in turn will likely fuel academic debate and stimulate further scholarly work.

One more factor is likely to open additional space for psychological explanations of international behavior. In the wake of the global financial crisis, many economists are now questioning their macro- and their microeconomic theories. The growing realization of the limits of parsimonious rational choice models in economics should, after the usual lag, have a liberating effect on theorists in international relations.

The opportunities for a productive and expanding research agenda that draws on prospect theory and psychological concepts more generally to explain puzzling international behavior are considerable. In the past, in explanations in international politics, just as in economics, rational choice was the default option against which deviance was measured. There was value to that kind of research to establish empirically the robustness of different patterns of thinking and choosing. That work is now largely accomplished, and the next wave of research is likely to transcend the debate between strong versions of rational choice and psychology.

Neuroscientists as well as social scientists argue that a strict divide between rationality and emotion is not supported by the evidence (McDermott, 2004b; Mercer, 2005a, 2010; Kahneman, 2011; Holmes, 2013). Feelings are important carriers of information and act as short circuits to processes of judgment. More sophisticated models of inference and judgment now consider that rationality presupposes and works through emotion. The binary between even soft rationality and psychological processes is empirically not supported and is unlikely to generate a productive research agenda. The next generation of research will examine how and when rational and psychological processes work together to explain choice and behavior.

Rational choice, in its strongest formal versions and especially when it models interdependent decision making, has played and will continue to play an important role in uncovering suboptimal and counterintuitive behavior that alerts scholars and policy makers to difficult collective action problems. Psychological approaches will be especially useful in identifying the microfoundations of the processes that deepen or limit escalatory behavior or self-defeating strategies. Psychological approaches will also be useful in uncovering the microfoundations of instrumentally rational strategic behavior (Kertzer & Rathbun, 2015; Rathbun, Kertzer, & Paradis, 2017). Building more complex models of judgment and choice that are tested through combinations of experiments, large-N studies, and careful comparative archival research of cases can only improve the accuracy of the baselines we use to identify the important anomalies and puzzles in international politics (Rabin, 2002; Jervis, 1998, pp. 989–990; Odell, 2002). What is anomalous or puzzling can only be determined against a baseline, and the more empirically grounded that baseline, the better the choice of puzzles and the more productive the research agenda.


Some parts of this essay draw on and expand an earlier, abridged article published in International Organization (71) 2017.


Abdellaoui, M. (2000). Parameter-free elicitation of utility and probability weighting functions. Management Science, 46(11), 1497–1513.Find this resource:

    Akerlof, G., & Yellen, J. (1985). Can small deviations from rationality make significant differences to economic equilibria? American Economic Review, 75(4), 708–720.Find this resource:

      Barberis, N. C. (2012) Thirty years of prospect theory in economics: A review and assessment. NBER Working Paper 18621.Find this resource:

        Berejikian, J. (2004). International relations under risk: Framing state choice. Albany: State University of New York Press.Find this resource:

          Berejikian, J., & Early, B. R. (2013). Loss aversion and foreign policy resolve. Political Psychology, 34(5), 649–671.Find this resource:

            Boettcher, W. (2004). The prospects for prospect theory: An empirical evaluation of international relations’ applications of framing and loss aversion. Political Psychology, 25(3), 331–362.Find this resource:

              Bruhin, A., Fehr-Duda, H., & Epper, T. (2010). Risk and rationality: Uncovering heterogeneity in probability distortion. Econometrica, 78(4), 1375–1412.Find this resource:

                Cameron, C., & Ho, T. G. (1994). Violations of the betweenness axiom and nonlinearity in probability. Journal of Risk & Uncertainty, 8(2), 167–196.Find this resource:

                  Cameron, C., Ho, T. G. & Kunreuther, H. (1989). Decision processes for low probability events: Policy implications. Journal of Policy Analysis & Management, 8(4), 565–592.Find this resource:

                    Carnevale, P. J. (2008). Positive affect and decision frame in negotiation. Group Decision & Negotiation, 17(1), 51–63.Find this resource:

                      Davis, J. W. (2000). Threats and promises: The pursuit of international influence. Baltimore: Johns Hopkins University Press.Find this resource:

                        Department of Defense, U.S. Strategic Command (USSTRATCOM). (2006). Defense Operations, Joint Operating Concept (DO JOC). Washington, DC: Department of Defense.

                        De Dreu, C. K. W., & McCusker, C. (1997). Gain-loss frames on cooperation in two-person social dilemmas: A transformational analysis. Journal of Personality & Social Psychology, 72(5), 1093–1106.Find this resource:

                          Elms, D. K. (2008). New directions for IPE: Drawing from behavioral economics. International Studies Review, 10(2), 239–265.Find this resource:

                            Farnham, B. (1992). Roosevelt and the Munich crisis: Insights from prospect theory. Political Psychology, 13(2), 205–235.Find this resource:

                              Farnham, B. (1994). Avoiding losses/taking risks: Prospect theory and international conflict. Ann Arbor: University of Michigan Press.Find this resource:

                                Farnham, B. (1997). Roosevelt and the Munich Crisis. Princeton, NJ: Princeton University Press.Find this resource:

                                  Fuhrmann, M., & Early, B. R. (2008). Following START: Risk acceptance and the 1991–1992 presidential nuclear initiatives. Foreign Policy Analysis, 4(1), 21–43.Find this resource:

                                    Goldgeier, J., & Tetlock, P. E. (2001). Psychology and international relations theory. Annual Review of Political Science, 4(1), 67–92.Find this resource:

                                      Gonzalez, R., & Wu, G. (1999). On the shape of the probability weighting function. Cognitive Psychology, 38(1), 129–166.Find this resource:

                                        Hafner-Burton, E. M., Hughes, D. A., & Victor, D. G. (2013). The cognitive revolution and the political psychology of elite decision making. Perspectives on Politics, 11(2), 368–386.Find this resource:

                                          Hall, T. H., & Ross, A. G. A. (2015). Affective politics after 9/11. International Organization 69(4), 847–879.Find this resource:

                                            Haltiwanger J., & Waldman, M. (1985). Rational expectations and the limits of rationality: An exercise in heterogeneity. American Economic Review, 75(3), 326–340.Find this resource:

                                              Holmes, M. (2013). The force of face-to-face diplomacy: Mirror neurons and the problem of intentions. International Organization, 67(4), 829–861.Find this resource:

                                                t’Hart, P., Stern, E. K., & Sundelius, B. (1997). Foreign policy making at the top: Political group dynamics. In P. t’Hart, E. K. Stern, & B. Sundelius (Eds.), Beyond group think: Political group dynamics and foreign policy making (pp. 3–34). Ann Arbor: University of Michigan Press.Find this resource:

                                                  Isenberg, D. J. (1986). Group polarization: A critical review and meta-analysis. Journal of Personality & Social Psychology, 50, 1141–1151.Find this resource:

                                                    Jervis, R. (1992). Political implications of loss aversion. Political Psychology, 13(2), 187–204.Find this resource:

                                                      Jervis, R. (1998). System effects: Complexity in social and political life. Princeton, NJ: Princeton University Press.Find this resource:

                                                        Kahneman, D. (2011). Thinking, fast and slow. New York: Farrar, Straus, & Giroux.Find this resource:

                                                          Kahneman, D., & Tversky, A. (1979). Prospect theory: An analysis of decision under risk. Econometrica, 47(2), 263–292.Find this resource:

                                                            Kahneman, D., & Tversky, A. (1984). Choices, values, and frames. American Psychologist, 39(4), 341–350.Find this resource:

                                                              Kanner, M. (2004). Framing and the role of the second actor: An application of prospect theory to bargaining. Political Psychology, 25(2), 213–239.Find this resource:

                                                                Kertzer, J. D., & Rathbun, B. C. (2015). Fair is fair: Social preferences and reciprocity in international politics. World Politics, 67(4), 613–655.Find this resource:

                                                                  Knetsch, J. L., & Sinden, J. A. (1984). Willingness to pay and compensation demanded: Experimental evidence of an unexpected disparity in measures of value. Quarterly Journal of Economics, 99(3), 507–521.Find this resource:

                                                                    Koszegi, B., & Rabin, M. (2006). A model of reference-dependent preferences. Quarterly Journal of Economics, 121(4), 1133–1165.Find this resource:

                                                                      Koszegi, B., & Rabin, M. (2007). Reference-dependent risk attitudes. American Economic Review, 97(4), 1047–1073.Find this resource:

                                                                        Koszegi, B., & Rabin, M. (2009). Reference-dependent consumption plans. American Economic Review, 99(3), 909–936.Find this resource:

                                                                          Kuhberger, A. (1998). The influence of framing on risky decisions: A meta-analysis. Organizational Behavior & Human Decision Processes, 75(1), 23–55.Find this resource:

                                                                            Levin, I. P., Schneider, S. L., & Gaeth, G. J. (1998). All frames are not created equal: A typology and critical analysis of framing effects. Organizational Behavior & Human Decision Processes, 76(2), 149–188.Find this resource:

                                                                              Levy, J. (1992a). An introduction to prospect theory. Political Psychology, 13(2), 171–186.Find this resource:

                                                                                Levy, J. (1992b). Prospect theory and international relations: Theoretical applications and analytical problems. Political Psychology, 13(2), 283–310.Find this resource:

                                                                                  Loewenstein, G. F., Weber, E. U., Hsee, C. K., & Welch, N. (2001). Risk as feelings. Psychological Bulletin, 127(2), 267–286.Find this resource:

                                                                                    Mandel, D. R. (2001). Gain-loss framing and choice: separating outcome formulations from descriptor formulations. Organizational Behavior & Human Decision Processes, 85(1), 56–76.Find this resource:

                                                                                      McDermott, R. (1998). Risk-taking in international politics: Prospect theory in American foreign policy. Ann Arbor: University of Michigan Press.Find this resource:

                                                                                        McDermott, R. (2004a). Prospect theory in political science: Gains and losses from the first decade. Political Psychology, 25(2), 289–312.Find this resource:

                                                                                          McDermott, R. (2004b). The feeling of rationality: The meaning of neuroscientific advances for political science. Perspectives on Politics, 2(4), 691–706.Find this resource:

                                                                                            McDermott, R. (2009). Prospect theory and negotiation. In R. Avenhaus & G. Sjostedt (Eds.), Negotiated risks (pp. 87–109). Berlin: Springer-Verlag.Find this resource:

                                                                                              McDermott, R., Fowler, J. H., & Smirnov, O. (2008). On the evolutionary origin of prospect theory preferences. Journal of Politics, 70(2), 335–350.Find this resource:

                                                                                                Mercer, J. (2005a). Rationality & psychology in international relations. International Organization, 59(1), 77–106.Find this resource:

                                                                                                  Mercer, J. (2005b). Prospect theory and political science. Annual Review of Political Science, 8, 1–21.Find this resource:

                                                                                                    Mercer, J. (2010). Emotional beliefs. International Organization, 64(1), 1–31.Find this resource:

                                                                                                      Odell, J. (2002). Bounded rationality and the world political economy. In D. Andrews, C. R. Henning, & L. W. Pauly (Eds.), Governing the world’s money (pp. 163–193). Ithaca, NY: Cornell University Press.Find this resource:

                                                                                                        Poulsen, L., Skovgard, N., & Aisbett, E. (2013). When the claim hits: Bilateral investment treaties and bounded rational learning. World Politics, 65(2), 273–313.Find this resource:

                                                                                                          Rabin, M. (2002). A perspective on psychology and economics. European Economic Review, 46(4), 657–685.Find this resource:

                                                                                                            Rathbun, B. C., Kertzer, J. D., & Paradis, M. (2017). Homo diplomaticus: Mixed-method evidence of variation in strategic rationality. International Organization, 71(S1), S109–S136.Find this resource:

                                                                                                              Russell, T., & Thaler, R. (1985). The relevance of quasi-rationality in competitive markets. American Economic Review, 75(5), 1071–1082.Find this resource:

                                                                                                                Saunders, E. N. (2017). No substitute for experience: Presidents, advisers and information in group decision-making. International Organization, 71(S1), S219–S247.Find this resource:

                                                                                                                  Schaub, G., Jr. (2004). Deterrence, compellence, and prospect theory. Political Psychology, 25(3), 389–411.Find this resource:

                                                                                                                    Schweitzer, M. E., & DeChurch, L. A. (2001). Linking frames in negotiations: Gains, losses and conflict frame adoption. International Journal of Conflict Management, 12(2), 100–113.Find this resource:

                                                                                                                      Sell, S., & Prakash, A. (2004). Using ideas strategically: The contest between business and NGO networks in intellectual property rights. International Studies Quarterly, 48(1), 143–175.Find this resource:

                                                                                                                        Shiller, R. (2003). From efficient markets theory to behavioral finance. Journal of Economic Perspectives, 17(1), 28–38.Find this resource:

                                                                                                                          Slovic, P., Finucane, M. L., Peters, E., & MacGregor, D. G. (2004). Risk as analysis and risk as feelings: Some thoughts about affect, reason, risk, and rationality. Risk Analysis, 24(2), 311–322.Find this resource:

                                                                                                                            Snyder, J. (1978). Rationality at the brink: The role of cognitive processes in failures of deterrence. World Politics, 30(3), 345–365.Find this resource:

                                                                                                                              Stein, J. G. (1985). Calculation, miscalculation, and conventional deterrence I: The view from Cairo. In R. Jervis, R. N. Lebow, & J. G. Stein (Eds.), Psychology and deterrence (pp. 34–59). Baltimore: Johns Hopkins University Press.Find this resource:

                                                                                                                                Stein, J. G. (2012). Fear, greed, and financial decision making. In J. Davis (Ed.), Psychology, strategy, and conflict: Perceptions of insecurity in international relations (pp. 82–100). London: Routledge.Find this resource:

                                                                                                                                  Stein, J. G. (2018). Loss avoidance and negotiation outcomes: Understanding the end game. In W. Zartman (Ed.), Closure. In press.Find this resource:

                                                                                                                                    Tajfel, H. (1982). Social identity and intergroup relations. New York: Cambridge University Press.Find this resource:

                                                                                                                                      Tajfel, H., & Turner, J. C. (1986). The social identity theory of intergroup behavior. In S. Worchel & W. G. Austin (Eds.), Psychology of intergroup relations (2d ed., pp. 7–24). Chicago: Nelson-Hall.Find this resource:

                                                                                                                                        Taleb, N. N. (2007). The Black Swan: The impact of the highly improbable. New York: Random House.Find this resource:

                                                                                                                                          Taliafero, J. W. (1998). Quagmires in the periphery: Foreign wars and escalating commitment in international conflict. Security Studies, 7(3), 94–144.Find this resource:

                                                                                                                                            Tetlock, P. E., & Gardner, D. (2015). Superforecasting: The art and science of prediction. London: Random House.Find this resource:

                                                                                                                                              Thaler, R. (1985). Mental accounting and consumer choice. Marketing Science, 4(3), 199–214.Find this resource:

                                                                                                                                                Thaler, R., & Sunstein, C. R. (2009). Nudge: Improving decisions about health, wealth, and happiness (2d ed.). London: Penguin Books.Find this resource:

                                                                                                                                                  Tversky, A., & Kahneman, D. (1981). The framing of decisions and the psychology of choice. Science, 211(4481), 453–458.Find this resource:

                                                                                                                                                    Tversky, A., & Kahneman, D. (1992). Advances in prospect theory: cumulative representation of uncertainty. Journal of Risk & Uncertainty, 5(4), 297–323.Find this resource:

                                                                                                                                                      Weyland, K. (1996). Risk taking in Latin American economic restructuring: Lessons from prospect theory. International Studies Quarterly, 40(2), 185–208.Find this resource:

                                                                                                                                                        Weyland, K. (2002). Politics of market reform in fragile democracies: Argentina, Brazil, Peru and Venezuela. Princeton, NJ: Princeton University Press.Find this resource: