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Expected Utility Framework Expected utility at the Heart of Rational Actor

Models We can relax the assumptions of rationality- or

recondition them while still using the structurefrom expected utility.

Framework allows the assessments ofprobabilities of success for different choices bytheir hoped for payoffs.

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Expected Utility Multiply the expected net benefits of an

action by the likelihood of success.Subtract the expected net costs by thelikelihood of failure.

Expected Utility for choice 1 then is EU=p(net benefits(b-costs))-(1-p)* (costs of

failure)

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E-U diagrammed: JSFParticipation

British Decision-maker(s)

Join US= .85357

Participate E-F=.75363.75

Tech=100*.5

Jobs=200

US Specs=100*.55

Close US=200*.50Close EU=150*.75

Security Needs=400*.55

Specs=100*.85

Security Needs=300*.95

Tech=50*.95

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Decision to Nationalize Oil Industry

1. WithoutCompensation 45+(-15)

Prob. Success x Benefits= .75 x(100(domestic)- 40(react))

Prob Fail x Costs= .25 x(-40D + -20Int)

2. Compensation 45-3.5

Prob. Success x Benefits= .90 x(70(domestic)- 20(react))=45

Prob Fail x Costs= .10 x(-30D + -5 Int)

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Decision Framework The decision maker can be what ever

level of analysis is used Allison uses individual and organizational Suspension of assumptions of rationality

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Two-level analysis Reaction to assumptions of realists about

unitary actor Confirms, or implements lower unit analysis of

Interdependence ideas. Sometimes called two-level games or two-level

bargaining Contains analysis of multiple levels of costs and

payouts expected for decision makers atdifferent levels

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Two-level Analysis Like structural idea of Democratic Peace

recognizes potential domestic constraintsor incentives on international actions

Arms negotiations, IMF bargaining(claims of domestic constraints), tradedeals, decisions for and againstintervention (Falklands/Malvinas.)

Explicitly includes domesticconsiderations.

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When to analyze with 2-Levels Unclear Issues where security implications are minor

or unclear. Between Interdependent partners States and IO’s Look for “win-sets” of interests or groups at

the international and domestic level forparticular actions-- Areas where both sidescan agree.

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Implications of Two-level Assumptions of unitary actor state must be relaxed

Ability of state to mobilize resource issue dependent Ability to predict state preferences Stability of preferences

Actors assess internal credibility of internationalactions or claims Kyoto and the US

Actors can use claims of credibility to either makepromises they won’t keep, or avoid makingpromises at all IMF- Peru negotiations.

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Decision-making Observations about individual decision makers.

Relaxations of Rat. Choice, Bounded Rat., Behavioral Psychology

Decisionmakers loaded with biases Informational biases Confirmatory bias Searching bias False certainty Framing Bias

• Risk tolerant from loss perspective, risk averse from gain. Bureaucratic Models of decisions

Bureaucracies gather and control information

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Relaxations of Rational Choice Bounded Rationality, decisions happen in a

search, evaluate decide cycle.• Herbert Simon• Search & Evaluation Phases provide limited option sets• Decision Phase triggered when minimum satisfactory

criteria met,- Satisficing Searching for alternatives is time-consuming

and costly Humans cannot possibly consider all alternatives and

implications, Decisionmakers embedded inorganizations or hold prior beliefs, ideologies thatdirect search behavior

Organizations can process larger possibilities, butSOP’s direct how information (Problem-option) setsare presented to decision makers

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Bureaucratic Decision-making Decisions rational in context of position of

individual within an organization may have sub-optimal outcomes. Even if information availableetc isn’t relaxed.

Organizations are made to efficiently deal withinformation and processes to direct informationand deal with repeated decision types becomeembedded.

Decision opportunities tend to be fit intoparticular parts of organizations according toperceived competencies.

Decisionmakers embedded in organizationrespond according to organizationalinterpretation of problem, goals and abilities ofsub-unit or organization.

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Psychological Biases Prospect Theory

Kahneman & Tversky Modifies Expected Utility format, rejects rational

choice Uncertainty of outcomes, prior experience,

perception of current situation all change decision-making process

Individuals have distorted sense of probabilitieseven when they are known and given. As probabilities approach 1 they are underweighted,

lower probabilities are over-weighted, certainty isvalued highest.

Lotteries operate on these observations

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Prospect Theory-FramingEffects Interpretations of outcomes are subject to

unequal weights of outcomes, framing-effects, aresult of expected and prior experience

Individuals are reluctant to accept losses, butadjust to (internalize gains) quickly.

Decision makers are more sensitive toanticipated losses, and experienced losses putthem in a “domain of loss reference point”

Care more about small losses than large ones(per unit), reluctant to realize losses- riskseeking.

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Framing effects example Domain assessed based on changes from

status quo. Domain of loss more persistent. Suppose that the U.S. prepares for Avian flu

expected to kill 6000 people. Two programsavailable, 1)Concentrated injection will save randomly selected

group of 2,000 100%, 2) Dilute injection will save 6,000 with a 33% chance

of success Which would you choose?

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Framing Effects, 2nd example Suppose that the U.S. prepares for Bird

flu expected to kill 6000 people. Twoprograms available, 1)Concentrated injection will leave 4,000 with

100% chance of death. 2) Dilute injection will leave everyone a

66.6666% chance of dying. Which would you choose?

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@80% choose program 1.

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Establish preferences by domainFill in the matrix with options

Greater perceived domain ofloss, greater acceptance of riskto avoid realizing it.

Domain of Gains- one unit gain,weighted worth less than oneexpected unit gain.

Domain of Loses-one unit lossweighted as worth (costingmore, more painful) a riskychoice to try and recover, evenif it has a lower expected utility(benefit times risk.)

http://www.unc.edu/depts/econ/byrns_web/Economicae/Figures/Prospect.htm

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How to execute an analysis Establish appropriate level analysis Salient actors

Leaders for example Bolivia, Brazil, Argentina, Chile

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Establishing the reference point Can be difficult to do in a non-tautological

manner. Depends on concept called mental accounting.

Debate whether accounting is aggregate orissue by issue.

Assessments of well-being; domain placementare often comparative in nature.

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Assessing reference domain Assess domain of leaders

Ideology, speeches, expressed. Structural position relative to other states. Political polls, media framing What is Morales’s domain, what may factor into it? What is President Da Silva’s domain?

Can be intuited by the way leaders frame issues forpublic discussion, or how issue framed in the media orby rival political actors?

Brazil recently discovered off-shore gas deposits- onlineby 2010 or so.

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P-T analyzing options Don’t need a specific weight and probability for each

option. Just need to rank options by advantage to success and

costs of failure. May need to include domestic andinternational factors in expected outcomes.

Analysis of cases anticipated outcomes ordered like: Best A, Best B, Worst B, Worst A A would be the risky option.

What could be options facing Morales? Full Seizure/ nationalization-no compensation Forced partnership Increased taxation- technical participation Status quo Reduced taxation- investment bonuses

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Assessing potential outcomes What could be outcomes facing Morales?

Domestic: best case_____ worst case ___ Internat Response: best case____ worst case____

Full Seizure/ nationalization-no compensation Forced partnership Increased taxation- technical participation Status quo Reduced taxation- investment bonuses Total Flight, Coup-de-etat

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Assess Brazil’s likely responses What could be Morales’s expectation of responses to

options? Dictates risks of failure. Full Seizure/ nationalization-no compensation

Forced partnership

Increased taxation- technical participation

Status quo

Reduced taxation- investment bonuses