Gains and Losses in the Eyes of the Beholder
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GAINS AND LOSSES IN THE EYES OF THE BEHOLDER: A COMPARATIVE STUDY OF FOREIGN POLICY DECISION MAKING UNDER RISK A Dissertation by YI YANG Submitted to the Office of Graduate Studies of Texas A&M University in partial fulfillment of the requirements for the degree of DOCTOR OF PHILOSOPHY December 2004 Major Subject: Political Science GAINS AND LOSSES IN THE EYES OF THE BEHOLDER: A COMPARATIVE STUDY OF FOREIGN POLICY DECISION MAKING UNDER RISK A Dissertation by YI YANG Submitted to the Office of Graduate Studies of Texas A&M University in partial fulfillment of the requirements for the degree of DOCTOR OF PHILOSOPHY Approved as to style and content by: ________________________________ _____________________________ Alex Mintz Di Wang (Chair of Committee) (Member) ________________________________ _____________________________ John D. Robertson Patricia Hurley (Member) (Head of Department) ________________________________ B. Dan Wood (Member) December 2004 Major Subject: Political Science iii ABSTRACT Gains and Losses in the Eyes of the Beholder: A Comparative Study of Foreign Policy Decision Making Under Risk. (December 2004) Yi Yang, B.A., Foreign Affairs College Chair of Advisory Committee: Dr. Alex Mintz Prospect theory is a descriptive model of individual decision-making under risk (Kahneman and Tversky 1979). The central tenet of prospect theory posits that the risk orientation of decision-makers is affected by the gains vs. losses domains in which they are situated. Individuals are predicted to be risk-averse in the domain of gains and risk seeking in the domain of losses. Although prospect theory made significant contributions to decision theory, it has important limitations. Foremost, as noted by Levy (1997a), prospect theory is not a complete theory of decision-making. Like rational choice theory, prospect theory attempts to explain choices or outcomes, not the processes through which those choices come about (Abelson and Levi 1985, 235). In response to this limitation of prospect theory, this dissertation intends to address the following set of puzzles: Do gains vs. losses domains affect the decision processes in foreign policy decision making? If so, in what way will decision strategies change? That is, what strategies are most likely to be employed when the decision maker is in the domain of gains? And, in contrast, what strategies are the most likely to be utilized when the decision maker is in the domain of losses? iv To address these questions, I develop and extend prospect theory to account for the impact of gains vs. losses domains on decision strategy selections by decision makers under risk. A set of testable hypotheses are then derived. To render a robust test of these hypotheses, I employ a cross-national experimental research design, utilizing American subjects first and then replicating the same experiment with subjects in mainland China. In terms of research instrument, I utilize the computerized decision process tracer – the Decision Board Platform. Specifically, the “moves” of decision makers are recorded by the Decision Board and then used to identify choices and to infer specific decision strategies. Statistical analysis of the experimental results demonstrates support for the major hypotheses. A decision maker in the domain of gains is more likely to employ a holistic, alternative-based, compensatory, and maximizing decision strategy than is a decision maker in the domain of losses. v DEDICATION To my parents, Xuedai Wei and Zhenmin Yang, with love and respect. vi ACKNOWLEDGEMENTS At last, I get to acknowledge all those who have been so important to this project, and there are so many people I need to thank for their advice, help, and support during the time I have endeavored to complete this dissertation. I must admit that this dissertation could not have finished without the help and support of family, friends, and mentors. First, I am truly grateful for the wisdom, encouragement, and support of my committee, beginning with my chair, the indispensable Alex Mintz. Without his insights, encouragement, and guidance, I would not be writing the final pages of a completed dissertation. Other committee members also deserve much credit for patiently reading through this dissertation and for providing useful comments. I have taken many courses from John Robertson, who has always been a great teacher and a great guy. My methods training mostly come from three graduate seminars taught by professor Dan Wood. Di Wang has always lent me his support. I have also received very helpful comments and suggestions from Professor Steven B. Redd. I would also like to thank Nehemia Geva for his contributions to my graduate education. I am very grateful for his generosity in time, support, advice, and sense of humor. The friendship of other graduate students at Texas A&M University made the work of a doctoral program also very much a pleasure. Belinda Bragg, Danette Brickman, Christina Suthammanont, Quan Li, Nick Theobald, Riad Attar, and Xinsheng vii Liu have offered me their help, support, and valuable friendship. I cannot survive without a community of friends. I am grateful for the love and support of my fiancée, Melanie Hart. I am so lucky to have her love. Finally, I wish to thank my parents, Xuedai Wei and Zhenmin Yang, for their patience, support, and sacrifice. This study is dedicated to them. viii TABLE OF CONTENTS Page ABSTRACT.…………………………………………………………………… iii DEDICATION.…………………………………………………………………. v ACKNOWLEDGEMENTS.……………………………………………………. vi TABLE OF CONTENTS.………………………………………………………. viii LIST OF FIGURES.…………………………………………………………….. xi LIST OF TABLES.……………………………………………………………… xii CHAPTER I INTRODUCTION: GAINS VS. LOSSES, DECISION STRATEGIES, AND CHOICES IN FOREIGN POLICY DECISION MAKING.………………... 1 Purpose.………………………………………………….. 3 Conceptual Framework.………………………………….. 4 General Overview of the Research Project.……………… 5 II THEORIES OF DECISION MAKING.…………………………. 9 Introduction.……………………………………………… 9 Rational Choice Theory.…………………………………. 9 Prospect Theory.…………………………………………. 16 Beyond the Rational-Cognitive Debate.…………………. 29 Conclusion.………………………………………………. 31 III APPLICATION OF PROSPECT THEORY IN INTERNATIONAL RELATIONS: THE EFFECTS OF GAINS VS. LOSSES………………………………………… 33 Introduction.………………………………………………. 33 Gains vs. Losses...……………………….………………... 33 Conclusion.………………………………………………... 40 ix CHAPTER Page IV EXTENDING PROSPECT THEORY TO EXPLAIN DECISION PROCESS IN FOREIGN POLICY DECISION MAKING……………………… 42 Introduction.………………………………………………. 42 Decision Strategies and Rules.……………………………. 44 Effects of Gains vs. Losses.……………………………….. 55 Conclusion.………………………………………………… 65 V EXPERIMENTAL METHODS IN INTERNATIONAL RELATIONS.……………………………… 67 Introduction.……………………………………………… 67 Experimental Methods in International Relations Research.………………………………………. 67 Strengths and Weaknesses of Experimental Methods.…… 72 Conclusion.………………………………………………. 76 VI PROCESS-TRACING TECHNIQUES AND FOREIGN POLICY ANALYSIS.………………………………………………………. 78 Introduction.………………………………………………. 78 Decision Tasks and Matrices.…………………………….. 79 Types of Process-Tracing Techniques.…………………… 81 Operationalization of Decision Strategies.……………….. 91 Conclusion.……………………………………………….. 98 VII THE EFFECTS OF GAINS VS. LOSSES ON FOREIGN POLICY DECISION MAKING: EXPERIMENTAL PROCEDURE…………...………. 99 Introduction.………………………………………………. 99 Process-Tracing Methods.…………………………………. 99 The Decision Board Platform (Version 4.0).………………. 100 Method.…………………………………………………….. 103 Conclusion.………………………………………………… 111 x CHAPTER Page VIII THE EFFECTS OF GAINS VS. LOSSES ON FOREIGN POLICY DECISION MAKING: EXPERIMENTAL RESULTS……………..………… 112 Introduction.………………………………………………. 112 Hypotheses.……………………………………………….. 112 Choices………………….………………………………… 113 Decision Strategies……….……………………………….. 121 Conclusion.………………………………………………… 133 IX CONCLUSION: GAINS VS. LOSSES, DECISION STRATEGIES, AND CHOICES IN FOREIGN POLICY DECISION MAKING…………………………………………….. 137 Introduction.………………………………………………. 137 Summary of Findings.…………………………………….. 138 Implications……………………………………………….. 142 Limitations.…………………………………………….…. 144 Plans for Future Research.………………………………… 145 REFERENCES.…………………………………………………………………… 147 APPENDIX A.……………………………………………………………………. 167 APPENDIX B.……………………………………………………………………. 170 APPENDIX C.……………………………………………………………………. 173 VITA.………………………………………………………………………………. 174 xi LIST OF FIGURES FIGURE Page 2-1 Hypothetical Value Function.…………………………………….... 18 4-1 Hypothetical Value Functions for States in Domain of Gains and Losses……………………………………………….. 59 7-1 Foreign Policy Decision Board.……………………………………. 101 8-1 The Proportion of Participants choosing the “Most-Risky” Option as a Function of Gains vs. Losses by Country………………………………………………………… 116 8-2 The Proportion of All Participants Choosing the “Most-risky” vs. “Less-risky” Options as a Function of Gains vs. Losses……………………………………………………………… 117 8-3 The Proportion of Information Bins Viewed (Holistic vs. Non-holistic Search) as a Function of Gains vs. Losses by Country.………………………………………………… 122 8-4 The Proportion of Information Bins Viewed (Holistic vs. Non-holistic Search) as a Function of Gains vs. Losses…………………………………………………………. 123 8-5 The Proportion of “Incorrect” (noncompensatory) Choices as a Function of Gains vs. Losses by Country…………… 129 8-6 The Proportion of “Correct” (compensatory) vs. “Incorrect” (noncompensatory) Choices as a Function of Gains vs. Losses ………………………………………………………… 130 8-7 The Proportion of Satisficing Strategy Employed as a Function of Gains vs. Losses by Country……………………. 132 8-8 The Proportion