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Risky Political Changes: Rational Choice vs Prospect Theory

  • Francesco Passarelli


This 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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Paper 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.

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Length: 37 pages
Date of creation: Nov 2011
Date of revision:
Handle: RePEc:slp:islawp:islawp39
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  1. Gans, Joshua S. & Smart, Michael, 1996. "Majority voting with single-crossing preferences," Journal of Public Economics, Elsevier, vol. 59(2), pages 219-237, February.
  2. Sanjay Jain & Sharun W. Mukand, 2003. "Redistributive Promises and the Adoption of Economic Reform," American Economic Review, American Economic Association, vol. 93(1), pages 256-264, March.
  3. Maxim Boycko & Andrei Shleifer & Robert W. Vishny, 1993. "Privatizing Russia," Brookings Papers on Economic Activity, Economic Studies Program, The Brookings Institution, vol. 24(2), pages 139-192.
  4. Giuseppe Attanasi, Luca Corazzini, Francesco Passarelli, 2007. "Voting as a Lottery," ISLA Working Papers 28, ISLA, Centre for research on Latin American Studies and Transition Economies, Universita' Bocconi, Milano, Italy.
  5. Galasso, Vincenzo, 2010. "The Role of Political Partisanship during Economic Crises," CEPR Discussion Papers 7834, C.E.P.R. Discussion Papers.
  6. Jain, Sanjay & Sharun Mukand, 2003. "Public Opinion and the Dynamics of Reform," Royal Economic Society Annual Conference 2003 114, Royal Economic Society.
  7. Anthony Downs, 1957. "An Economic Theory of Political Action in a Democracy," Journal of Political Economy, University of Chicago Press, vol. 65, pages 135.
  8. Andrew Gelman & Lane Kenworthy & Yu-Sung Su, 2010. "Income Inequality and Partisan Voting in the United States," Social Science Quarterly, Southwestern Social Science Association, vol. 91(s1), pages 1203-1219.
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