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The Sensitivity of Critical Risk Values to Small Changes in the Value of the Status Quo

Author

Listed:
  • Carlson Lisa J

    (University of Idaho)

  • Dacey Raymond

    (University of Idaho)

Abstract

This paper reports on a technical result that we have derived from various formal models that support a prospect-theoretic account of the traditional deterrence game. The result is as follows. In sequential prospect-theoretic play of the traditional deterrence game, under both one-sided and two-sided incomplete information, Challenger's decision over whether or not to threaten Defender can be remarkably sensitive to the specification of the model's parameter values, including very small changes in the valuation of the status quo.This result supports the intuition commonly advanced in the International Relations literature: a loss averse decision maker will choose the risk averse act if the sure-thing is perceived to be acceptable, and will choose the risk preferring act if the sure-thing is perceived to be unacceptable. The foregoing intuitive explanation for a decision maker's risk-related behavior relies, in general, on only two variables: the presence of loss aversion and the valuation of the status quo. Here we show that this explanation is under-specified in that the degree of sensitivity also depends on the quality of Challenger's probability assessment and on the relative size of the value of the status quo vis-à-vis the size of the other payoffs in the game.

Suggested Citation

  • Carlson Lisa J & Dacey Raymond, 2008. "The Sensitivity of Critical Risk Values to Small Changes in the Value of the Status Quo," Peace Economics, Peace Science, and Public Policy, De Gruyter, vol. 13(2), pages 89-110, January.
    • Handle: RePEc:bpj:pepspp:v:13:y:2008:i:2:n:2
    DOI: 10.2202/1554-8597.1116
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    References listed on IDEAS

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    1. Jeffrey D. Berejikian, 2002. "A Cognitive Theory of Deterrence," Journal of Peace Research, Peace Research Institute Oslo, vol. 39(2), pages 165-183, March.
    2. Tversky, Amos & Kahneman, Daniel, 1992. "Advances in Prospect Theory: Cumulative Representation of Uncertainty," Journal of Risk and Uncertainty, Springer, vol. 5(4), pages 297-323, October.
    3. William Harbaugh & Kate Krause & Lise Vesterlund, 2002. "Risk Attitudes of Children and Adults: Choices Over Small and Large Probability Gains and Losses," Experimental Economics, Springer;Economic Science Association, vol. 5(1), pages 53-84, June.
    4. Brock F. Tessman & Steve Chan, 2004. "Power Cycles, Risk Propensity, and Great-Power Deterrence," Journal of Conflict Resolution, Peace Science Society (International), vol. 48(2), pages 131-153, April.
    5. Lisa J. Carlson & Raymond Dacey, 2006. "Sequential Analysis of Deterrence Games with a Declining Status Quo," Conflict Management and Peace Science, Peace Science Society (International), vol. 23(2), pages 181-198, April.
    6. Christopher K. Butler, 2007. "Prospect Theory and Coercive Bargaining," Journal of Conflict Resolution, Peace Science Society (International), vol. 51(2), pages 227-250, April.
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