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"Prospect Theory in International Relations" published on by Oxford University Press.

Most would agree that priority setting is necessary to avoid a financial collapse in the health sector. It is much harder to find criteria how to do it. Discussions lead straight to the principles of decision making. But since all theories depend on assumptions given to make them work, debates on the assumption side are open for any kind of critic. This might be a reason hyprefernce-based methods for evaluations of different health states are not as common and popular as they could be. Indeed, it can be shown that results derived by such methods are severly biased by phenomenons which are summarized in a so-called "Prospect Theory". These biases are quite obvious if one compares data of affected and unaffected people. But this theory offers, as well, a way to get results more accurate.

We study the asset allocation of an investor with prospect theory (PT) preferences. First, we solve analytically the two-asset problem of the PT investor for one risk-free and one risky asset and find that loss aversion and the reference return affect differently less ambitious investors and more ambitious investors. Second, we empirically investigate the performance of a PT portfolio when diversifying among a stock market index, a government bond and gold, in Europe and the US. We focus on investors with PT preferences under different scenarios regarding the reference return and the degree of loss aversion and compare their portfolio performance with the performance of investors under CVaR, risk neutral, linear loss averse and in particular mean-variance (MV) preferences. We find that, in the US, PT portfolios significantly outperform (in terms of returns) mean-variance portfolios in the majority of cases. Also with respect to riskadjusted performance, PT investment outperforms MV investment in the US. Similar results, however, can not be observed in Europe. Finally, we analyze asymmetric effects along economic uncertainty and observe that PT investment leads to higher returns than MV investment in times of larger economic uncertainty, especially in the US.

We study the asset allocation of an investor with prospect theory (PT) preferences. First, we solve analytically the two-asset problem of the PT investor for one risk-free and one risky asset and find that loss aversion and the reference return affect differently less ambitious investors and more ambitious investors. Second, we empirically investigate the performance of a PT portfolio when diversifying among a stock market index, a government bond and gold, in Europe and the US. We focus on investors with PT preferences under different scenarios regarding the reference return and the degree of loss aversion and compare their portfolio performance with the performance of investors under CVaR, risk neutral, linear loss averse and in particular mean-variance (MV) preferences. We find that, in the US, PT portfolios signiffcantly outperform (in terms of returns) mean-variance portfolios in the majority of cases. Also with respect to riskadjusted performance, PT investment outperforms MV investment in the US. Similar results, however, can not be observed in Europe. Finally, we analyze asymmetric effects along economic uncertainty and observe that PT investment leads to higher returns than MV investment in times of larger economic uncertainty, especially in the US.

Despite many applications of prospect theory's concepts to explain political and strategic phenomena, formal analyses of strategic problems using prospect theory are rare. Using Fearon's model of bargaining, Tversky and Kahneman's value function, and an existing probability weighting function, I construct a model that demonstrates the differences between expected value and prospect theory when applied to strategic interaction. Critically important to this demonstration is an examination of different types of reference points that make sense for bargaining problems. Four types of reference points are discussed and analyzed: power-based, equity, variants of the status quo, and extreme ``I-want-it-all'' reference points. Each of these types of reference points produce different bargaining behavior at the individual level and in combination with the type of reference point of the other actor. Additionally, I demonstrate that bargaining failure is possible for this model under complete and perfect information using prospect-theoretic logic.

Prospect theory is the most influential behavioral theory of choice in the social sciences. Its creators won a Nobel Prize in economics, & it is largely responsible for the booming field of behavioral economics. Although international relations theorists who study security have used prospect theory extensively, Americanists, comparativists, & political economists have shown little interest in it. The dominant explanation for political scientists' tepid response focuses on the theoretical problems with extending a theory devised in the lab to explain political decisions in the field. This essay focuses on these problems & reviews suggested solutions. It suggests that prospect theory's failure to ignite the imagination of more political scientists probably results from their aversion to behavioral assumptions & not from problems unique to prospect theory. 92 References. Adapted from the source document.

Deterrence and compellence couple demands for inaction and action, respectively, to a threat of sanctions. Conventional wisdom holds that deterrence requires less coercive effort than compellence, yet expected utility theory contradicts this claim. Only if exogenous factors affect these situations in a systematic and asymmetrical manner will the claim hold within expected utility theory. Prospect theory provides a systematic and endogenous account for this claim. Experimental findings suggest the degree of effort required to obtain compliance in comparable deterrence and compellence situations. Deterrence is "easier" than compellence, but this relationship is variable. Deterrence requires less effort than expected, and the relative effort it requires decreases substantially as the stakes demanded and costs threatened grow. Compellence requires more effort than expected, and the relative effort it requires decreases slightly as the stakes demanded and costs threatened grow.