Risky Political Changes: Rational Choice vs Prospect Theory
AbstractThis paper describes policy alternatives as lotteries, and studies how policy preferences are distorted by the cognitive anomalies postulated by Prospect Theory. Loss aversion induces a status quo bias. However, due to the reflection effect, the bias is asymmetric: too moderate attitudes toward a good reform or a good candidate, and too low severity toward bad politics. The reflection effect also determines low loyalty in partisan voting and weak concerns about partisan issues. Preferences about nonpartisan issues are independent of wealth because people use the status quo as a reference point. Ambitious platforms have more chances to pass than incremental and detailed changes because people are risk seeking in the realm of losses. In general, according to Prospect Theory the policy conflict within the society is smoother than under full rationality. Moreover, a pure majority system yields either prolonged conservatism or a radical abandonment of the status quo.
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Bibliographic InfoPaper provided by ISLA, Centre for research on Latin American Studies and Transition Economies, Universita' Bocconi, Milano, Italy in its series ISLA Working Papers with number 39.
Length: 37 pages
Date of creation: Nov 2011
Date of revision:
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prospect theory; behavioral economics; voting behavior; behavioral political economy;
Find related papers by JEL classification:
- C9 - Mathematical and Quantitative Methods - - Design of Experiments
- D72 - Microeconomics - - Analysis of Collective Decision-Making - - - Political Processes: Rent-seeking, Lobbying, Elections, Legislatures, and Voting Behavior
- D81 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Criteria for Decision-Making under Risk and Uncertainty
- H1 - Public Economics - - Structure and Scope of Government
This paper has been announced in the following NEP Reports:
- NEP-ALL-2011-11-21 (All new papers)
- NEP-CBE-2011-11-21 (Cognitive & Behavioural Economics)
- NEP-CDM-2011-11-21 (Collective Decision-Making)
- NEP-EVO-2011-11-21 (Evolutionary Economics)
- NEP-HME-2011-11-21 (Heterodox Microeconomics)
- NEP-HPE-2011-11-21 (History & Philosophy of Economics)
- NEP-POL-2011-11-21 (Positive Political Economics)
- NEP-UPT-2011-11-21 (Utility Models & Prospect Theory)
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