Why take risks?

International relations is an inherently risky realm: policy choices have implications for gains and losses at home and abroad, whether economic, military, or political. Leaders make decisions in uncertain environments and policy outcomes are determined partly by their choices and partly by the choices of foreign leaders. Understanding, explaining, and predicting when leaders are more or less likely to take risks, and what types of risks they are likely to take, is of the utmost importance.

Two major trends in analyzing risky decision-making in international relations are the rational choice and the psychological approaches. The rational choice approach, derived from economics, has developed a normative model of how decisions should be made, emphasizing how cost-benefit calculations combine with probabilities for achieving the best, or optimal, outcome given certain constraints. The psychological approach highlights certain impediments to rational decision-making, such as leaders’ personalities, stress, anger, dismissal of evidence inconsistent with prior beliefs, commitment to group solidarity, overconfidence, and attributing evil intent to the opponent. Ironically, while much of the psychological literature criticizes the rational choice model’s theoretical foundations for not accurately accounting for all aspects of the process of decision-making, it adopts the rational choice’s normative foundations in assessing historical decisions. That is, much of the psychological literature evaluates actual decisions in such terms as errors or misjudgments, the implicit assumption being that leaders could have avoided negative consequences if they had adhered to the norms of rational decision-making.

More recently, a third approach to explaining risky policy decisions has drawn on the cognitive literature known as prospect theory. Rose McDermott’s Risk-Taking in International Politics: Prospect Theory in American Foreign Policy analyzes foreign policy decisions in the context of this growing literature. McDermott, an assistant professor of political science at Cornell University, provides a concise introduction to prospect theory’s findings and their implications for the analysis of foreign policy decision-making. Prospect theory differs from the rational choice and psychological approaches in two critical ways. First, prospect theory indicates that people are risk-averse when seeking gains and risk-acceptant when attempting to avoid losses. Second, whether a situation is viewed as involving potential losses or gains depends critically on how the issue is “framed,” perceived, or portrayed: it is not necessarily a function of its “objective” characteristics. The implications of prospect theory are in stark contrast to those of the rational choice and the psychological approaches. Rational choice actors will only take risks in order to make gains. Moreover, differences in their willingness to take risks reflect personal disposition rather than perceptions of whether actions or policies are pursued to avoid losses or to realize gains. And, in contrast with the psychological approach, prospect theory highlights general tendencies rather than the idiosyncrasies of individual leaders.

As part of her analysis, McDermott examines prospect theory’s hypotheses against the evidence of four foreign policy decisions made by Presidents Eisenhower and Carter: President Eisenhower’s denial of American espionage when the U-2 spy plane was shot down by the Soviet Union; his decision not to support Britain, France, and Israel in their tripartite attack on Egypt after its nationalization of the Suez Canal; President Carter’s decision to allow the Shah of Iran into the United States, which sparked the hostage crisis; and his failed mission to rescue American hostages held at the embassy in Iran. Not surprisingly, prospect theory’s expectations are borne out in each case: when decision-makers sought to avoid losses, they took riskier actions than when they sought to pursue gains.

While McDermott’s research demonstrates the utility of prospect theory in explaining decisions, there are a number of ambiguities that vitiate the cogency of her argument. Here, three of them shall be discussed: situationalism versus subjectivism; definitions of risk; and normative versus descriptive goals.

In terms of situationalism and subjectivism, McDermott alternates between suggesting that gains and losses are objectively inhere in a situation and arguing that...