Expected Utility Framework
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Expected utility at the Heart of Rational Actor
Models
We can relax the assumptions of rationality- or
recondition them while still using the structure
from expected utility.
Framework allows the assessments of
probabilities of success for different choices by
their 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 the
likelihood 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: JSF
Participation
British Decision-maker(s)
Join US= .85
357
Security Needs=400*.55
Participate E-F=.75
363.75
Jobs=200
Security Needs=300*.95
Tech=50*.95
Tech=100*.5
Close US=200*.50
US Specs=100*.55
Close EU=150*.75
Specs=100*.85
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Decision to Nationalize Oil Industry
Prob. Success x Benefits= .75 x
(100(domestic)- 40(react))
1. Without
Compensation 45+(-15)
Prob Fail x Costs= .25 x(-40D + -20Int)
Prob. Success x Benefits= .90 x
(70(domestic)- 20(react))=45
2. Compensation 45-3.5
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
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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 at
different levels
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Two-level Analysis
Like structural idea of Democratic Peace
recognizes potential domestic constraints
or incentives on international actions
 Arms negotiations, IMF bargaining
(claims of domestic constraints), trade
deals, decisions for and against
intervention (Falklands/Malvinas.)
 Explicitly includes domestic
considerations.
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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 for
particular actions-- Areas where both sides
can agree.
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Implications of Two-level
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Assumptions of unitary actor state must be relaxed
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Actors assess internal credibility of international
actions or claims
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Ability of state to mobilize resource issue dependent
Ability to predict state preferences
Stability of preferences
Kyoto and the US
Actors can use claims of credibility to either make
promises they won’t keep, or avoid making
promises at all
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IMF- Peru negotiations.
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Decision-making
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Observations about individual decision makers.
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Relaxations of Rat. Choice, Bounded Rat.,
Behavioral Psychology
Decisionmakers loaded with biases
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Informational biases
Confirmatory bias
Searching bias
False certainty
Framing Bias
• Risk tolerant from loss perspective, risk averse from gain.
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Bureaucratic Models of decisions
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Bureaucracies gather and control information
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Relaxations of Rational Choice
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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
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Searching for alternatives is time-consuming
and costly
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Humans cannot possibly consider all alternatives and
implications, Decisionmakers embedded in
organizations or hold prior beliefs, ideologies that
direct search behavior
Organizations can process larger possibilities, but
SOP’s direct how information (Problem-option) sets126
are presented to decision makers
Bureaucratic Decision-making
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Decisions rational in context of position of
individual within an organization may have suboptimal outcomes. Even if information available
etc isn’t relaxed.
Organizations are made to efficiently deal with
information and processes to direct information
and deal with repeated decision types become
embedded.
Decision opportunities tend to be fit into
particular parts of organizations according to
perceived competencies.
Decisionmakers embedded in organization
respond according to organizational
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interpretation of problem, goals and abilities of
Psychological Biases
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Prospect Theory
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Modifies Expected Utility format, rejects rational
choice
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Uncertainty of outcomes, prior experience,
perception of current situation all change decisionmaking process
Individuals have distorted sense of probabilities
even when they are known and given.
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Kahneman & Tversky
As probabilities approach 1 they are underweighted,
lower probabilities are over-weighted, certainty is
valued highest.
Lotteries operate on these observations
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Prospect Theory-Framing
Effects
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Interpretations of outcomes are subject to
unequal weights of outcomes, framing-effects, a
result of expected and prior experience
Individuals are reluctant to accept losses, but
adjust to (internalize gains) quickly.
Decision makers are more sensitive to
anticipated losses, and experienced losses put
them in a “domain of loss reference point”
Care more about small losses than large ones
(per unit), reluctant to realize losses- risk
seeking.
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Framing effects example
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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 programs
available,
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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
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Suppose that the U.S. prepares for Bird
flu expected to kill 6000 people. Two
programs 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.
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Which would you choose?
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@80% choose program 1.
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Establish
preferences
by
domain
Fill in the matrix with options
Greater perceived domain of
loss, greater acceptance of risk
to avoid realizing it.
Domain of Gains- one unit gain,
weighted worth less than one
expected unit gain.
Domain of Loses-one unit loss
weighted as worth (costing
more, more painful) a risky
choice to try and recover, even
if 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
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Establish appropriate level analysis
Salient actors
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Leaders for example
Bolivia, Brazil, Argentina, Chile
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Establishing the reference point
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Can be difficult to do in a non-tautological
manner.
Depends on concept called mental accounting.
Debate whether accounting is aggregate or
issue by issue.
Assessments of well-being; domain placement
are often comparative in nature.
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Assessing reference domain
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Assess domain of leaders
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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 for
public discussion, or how issue framed in the media or
by rival political actors?
Brazil recently discovered off-shore gas deposits- online
by 2010 or so.
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P-T analyzing options
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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 and
international factors in expected outcomes.
Analysis of cases anticipated outcomes ordered like:
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Best A, Best B, Worst B, Worst A
A would be the risky option.
What could be options facing Morales?
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Full Seizure/ nationalization-no compensation
Forced partnership
Increased taxation- technical participation
Status quo
Reduced taxation- investment bonuses
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Assessing potential outcomes
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What could be outcomes facing Morales?
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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
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What could be Morales’s expectation of responses to
options? Dictates risks of failure.
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Full Seizure/ nationalization-no compensation
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Forced partnership
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Increased taxation- technical participation
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Status quo
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Reduced taxation- investment bonuses
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