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interests, and the interactions which led them to the study of risk illuminate their insights into the processes by which science progresses and a field of study evolves. This feature is an unexpected bonus to an excellent and much needed survey of social science research on risk. The editors are to be com- mended for doing an excellent job of gathering the different perspectives and insights of leading thinkers in one place, and in working with them to create an accessible and educational book, useful to the newcomer to the field of risk analysis and the veteran alike.

M . V . RAJEEV GOWDA is Research Fellow, Science and Public Policy Program, and Assistant Professor, Department of Political Science, at the University of Oklahoma.

Sharon Morris

Avoiding Losses, Taking Risks: Prospect Theory and International Conflict, ed- ited by Barbara Farnham. Ann Arbor, MI: The University of Michigan Press, 1994, 165 pp., $18.95 paper.

Why do some states pursue policies that are obviously failing, as one might argue the United States did in Vietnam? Why are some leaders willing to run exception1 risks and suffer enormous costs for objectives that hardly seem worth the trouble to outside observers? In short, if states are rational actors as they are often assumed to be, why does their behavior often appear to violate the assumption that they will maximize expected utility in pursuit of their international objectives?

There is a large body of literature in the social sciences that questions the value of using expected utility to explain political decisionmaking. Avoiding Losses, Taking Risks fits into this broader critique. Rather than take up the by now familiar arguments both for and against rational choice, however, the contributors to this volume present an extended examination of prospect theory, one of the leading alternatives to expected utility as a theory of decisionmaking under risk. First developed by Daniel Kahneman and Amos Tversky in 1979, prospect theory emphasizes decsriptive accuracy over nor- mative appeal and shows how individual behavior systematically deviates from rational norms in real choice settings. In a series of theoretical and empirical studies, five political scientists and one psychologist apply the insights generated by prospect theory to decisionmaking in international politics and evaluate its ability to provide a richer, more accurate account of foreign policy choice than expected utility.

Prospect theory has yet to enter the mainstream in political science, there- fore Jack Levy’s first essay is particularly useful because it provides a compre- hensive, relatively non-technical introduction to the literature. Prospect theo- ry’s main finding is that attitudes toward risk reverse depending on the representation or “frame” of a choice problem. Specifically, individuals are found to be risk averse when presented with the chance to make gains but are risk seeking when the equivalent choice problem is represented as a means of avoiding losses. Most applications in political science have focused on this finding; however, as Levy points out, other aspects of the theory can either reinforce this tendency or in some cases reverse it. One tendency that

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reinforces risk seeking for losses is the endowment effect which posits that individuals overvalue what they currently have relative to objects of equal value that they do not have. Another is loss aversion, or the fact that individu- als feel more pain associated with a loss than pleasure in a comparable gain. Finally, Kahneman and Tversky found that individuals tend to approach probabilities in a nonlinear manner and that for extremely small probabilities the effects described above reverse and lead to risk acceptance for gains and risk aversion for losses.

This introduction is far more comprehensive than most and a number of the more complex elements of the theory are handled with remarkable clarity. It could have benefited from a more systematic treatment of expected utility since this is prospect theory’s main competitor. Levy provides a very brief summary of rational choice and makes a number of side-by-side comparisons throughout his discussion; however, he assumes a fair amount of knowledge on the part of the reader about the basic assumptions and mechanics of rational choice. Still, this essay should be accessible to most readers at the beginning graduate level and beyond.

Focusing primarily on loss aversion and the endowment effect, Robert Jervis next considers how prospect theory might contribute to an analysis of state behavior in international politics. One of the most intriguing aspects of Jervis’s essay is his argument that prospect theory can provide the logic behind a number of previously made claims about international conflict and bargaining, such as the fact that compellence is more difficult than deterrence, that states defending the status quo have a bargaining advantage, and that using threats against insecure states (or states in the domain of losses) may backfire and lead to spirals of hostility. He generates an enormous number of possible hypotheses on issues ranging from deterrence and bargaining to decisions for war and crisis stability. To take one example, if loss aversion and the endowment effect are widespread, states may refuse bargains that will make them better-off even if only moderate concessions are required. In order to explain the relative lack of mutually beneficial agreements in international politics, rational choice has focused primarily on the costs of acquiring information and the difficulty of guarding against “cheating” by one’s opponent. Prospect theory on the other hand directs attention to differ- ent variables such as the manner in which the bargain is being framed by the relevant players.

The central portion of the book consists of three case studies of foreign policy behavior that appear to be at variance with standard expected utility calculations. The first case by Barbara Farnham examines Roosevelt’s deci- sion to intervene in the Munich Crisis; the second by Rose McDermott looks at Carter’s decision to try to rescue the American hostages in Iran; and the third by Audrey McInerney explores Soviet behavior in the Middle East lead- ing up to the Six-Day War. One of the stated goals of this book is to evaluate the ability of prospect theory to provide a better explanation than rational choice for actual cases of foreign policy decisionmaking. In light of this goal, the case studies constitute the most frustrating section of the book. With the exception of Barbara Farnham’s analysis, none of the other authors deal explicitly with rational choice counterarguments to their claims. In fact, a close reading of the two latter cases yields equally plausible rational choice accounts for the actions that the authors are using prospect theory to explain. For example, Rose McDermott argues that, given Carter’s predilection for

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peaceful conflict resolution, his decision to attempt a risky rescue operation is puzzling. In the course of her discussion, however, she points out that negotiations with revolutionary Iran had ground to a halt and that the Soviet invasion of Afghanistan had fundamentally altered Carter’s views about the utility of dealing peacefully with certain types of regimes. His shift in strategy can be quite easily be explained as a rational response to this new information.

The cases also illustrate the enormous conceptual and methodological dif- ficulties associated with applying prospect theory to the study of international decisionmaking. The two concluding essays by Jack Levy and Eldar Shafir examine these difficulties in more detail and they raise two broad areas of concern. The first considers the problems inherent in applying findings from a tightly controlled experimental setting to the dynamic environment of international politics. For example, in Kahneman and Tversky’s work, refer- ence points and probabilities are evident from the way the choice problem is structured. In real choice settings different actors bring different frames to a problem and the relevant decisionmaker must choose among the various representations. In an analysis of actual cases it becomes very difficult to disentangle whether the frame caused the strategy choice, a prior preference for a certain strategy caused the frame, or something else caused both.

The second broad area concerns the difficulty of operationalizing the vari- ables that prospect theory uses to explain behavior. Again, one problem that emerges clearly from an examination of the cases is deciding how to measure risk. What one person views as a risky decision another may not, and it is not always the case that military action is viewed by decisionmakers as the riskiest option. It is also extraordinarily difficult to evaluate and compare the different strategies available to decisionmakers and to rule out the expla- nation that one is chosen over another not because of framing and loss aver- sion but simply because it would be the preferred strategy under any represen- tation of the problem. The difficulties inherent in measuring preferences and probabilities outside of an experimental setting also plague expected utility; however, because prospect theory requires a consideration of how individuals set reference points and frame choice problems, i t is far more data intensive than rational choice.

Perhaps the most striking feature of this book is the extraordinary note of caution that many of the contributors interject into their discussions about the value of using prospect theory to analyze political behavior. It is rare that those who introduce a new approach provide such a careful exploration of its limits. Yet, despite their recognition of the difficulties inherent in applying prospect theory to actual cases, the authors argue that there is reason to be cautiously optimistic about the theory’s potential for providing a richer, more realistic account of foreign policy behavior.

The greatest strength of this book is not that the arguments presented definitively refute expected utility but that they direct attention to a whole new range of variables and questions that have received little attention in theories of decisionmaking that begin with the rationality assumption. The application of prospect theory to international politics forces us to ask not only about the costs and benefits of certain strategies but about how states or individuals leaders are defining the problems they face, how they approach losses and gains, and how they measure risk. In discussing the formation of reference points, the authors touch on the role of ideology and historical analogy, the ambiguity of the status quo, and the length of time it takes for

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states to reconcile themselves to a new resolution of international issues. In attempting to evaluate the level of risk associated with different strategies, they explore the difficult trade-offs leaders must make between domestic and international risks and immediate risks versus risks in the future. Even if these questions are difficult to answer, they are well worth asking and, in this regard, the book offers an interesting challenge to the assumption held by many practitioners of rational choice that we need only concern ourselves with political outcomes and that accurate predictions of state behavior can be made without an analysis of the process of choice.

SHARON MORRIS is a Graduate Student i n the Department of Political Science, University of Chicago.

Helen F. Ladd

The Price of Federalism by Paul E. Peterson. Washington, DC: The Brookings Institution, 1995, 231 pp., $36.95 cloth, $15.95 paper.

The 1994 congressional elections ushered in a Republican Congress com- mitted to reducing the size of government and devolving to subnational governments a broad range of governmental responsibilities. A s a result, questions about who should do what in our U.S. federal system have cata- pulted to the forefront of the public agenda. Unfortunately, much of the current discussion in Washington about policy initiatives, such as converting welfare assistance to block grants for states that would lead to major changes in our federal system, is not well-grounded in a solid understanding of how our federal system works and, from a normative point of view, how responsi- bilities ought to be divided among levels of government. A major goal of Paul Peterson’s book, The Price of Federalism, is to fill this gap.

The book has two main sets of arguments. The first is that each of the two major parties has been half right. Democrats, argues Peterson, are right in trying to centralize redistributional spending and Republicans are right in wanting to give back to subnational governments responsibility for basic public services and other programs that foster economic development.

The second line of argument, which represents the heart of the book, is that the U.S. federal system has been evolving in a sensible direction. Peterson draws this conclusion from “testing” how well two positive, predictive theo- ries-to which he gives the names functional federalism and legislative feder- alism-explain recent trends in our federal system. He concludes that while legislative federalism helps to explain a variety of short-run changes that have imposed some costs on the system, functional federalism has prevailed over the long haul. Consequently, argues Peterson, the “price” of federalism has been falling: Regional disparities have been reduced and legislative bur- den shifting is now less than it was in the past. In sum, our U S . federal system has been working quite well and attempts to counter its basic logic by, for example, shifting redistribution to subnational governments are neither desirable nor likely to be sustained.

Despite their limited development in the book, the normative arguments deserve to be highlighted because they are central to Peterson’s positive theory of functional federalism and they provide the foundation for the policy