Prospect theory and public service outcomes: Examining risk preferences in relation to public sector reforms

Published date01 December 2017
DOIhttp://doi.org/10.1111/padm.12324
Date01 December 2017
AuthorMartin Baekgaard
SYMPOSIUM ARTICLE
Prospect theory and public service outcomes:
Examining risk preferences in relation to public
sector reforms
Martin Baekgaard
Department of Political Science, University of
Aarhus, Denmark
Correspondence:
Martin Baekgaard, Department of Political
Science, University of Aarhus, Bartholins Alle,
Building 1331, Aarhus 8000, Denmark.
Email: MartinB@ps.au.dk
Prospect theory has been widely acknowledged in the social
sciences as a frame for understanding how people deal with uncer-
tainty. Yet, little is known about whether key expectations from
prospect theory also hold in a public service setting. In this article,
I draw on prospect theory to examine under what conditions citi-
zens prefer uncertain but potentially advantageous reforms to
reforms with more certain outcomes. A population-based survey
experiment with the participation of 1,395 Danish citizens and
two consecutive experiments with 1,680 US MTurkers produced a
consistent pattern across contexts: citizens to a large extent prefer
certain to risky reforms and are more willing to take risks if
reforms are associated with gains rather than losses. The latter
finding is in opposition to expectations and suggests that the parti-
cularities of the public sector should be taken into account when
applying insights from prospect theory to this sector.
1|INTRODUCTION
Uncertainty about the effects of public initiatives and reforms is a fundamental condition in politics and the public
sector. Multi-dimensional outcomes produced by several actors with sometimes competing interests and complex
and ever-changing scope conditions contribute to this fundamental uncertainty. Yet, uncertainty is arguably a varia-
ble condition. Sometimes, the effects of initiatives and reforms are relatively given; other times, they are highly
uncertain and may be both positive and negative. The variation in the certainty with which outcomes will occur is
relevant to a range of questions of importance to politics and the organization of the public sector. These are ques-
tions such as how and under what conditions citizens prefer a given reform proposal to competing proposals, how
policy-makers can build support for reforms of the public sector, how citizens prioritize between different kinds of
outcomes, and whether they to a larger extent are willing to accept risky reforms to achieve some outcomes than
others (e.g. Boeri et al. 2002; ODonnell and Tinios 2003; Rattsø and Sørensen 2004; Boeri and Tabellini 2012).
In this article, I draw on prospect theory (Kahneman and Tversky 1979; Tversky and Kahneman 1992) to exam-
ine under what conditions citizens prefer risky but potentially advantageous reforms to reforms with more
DOI: 10.1111/padm.12324
Public Administration. 2017;95:927942. wileyonlinelibrary.com/journal/padm © 2017 John Wiley & Sons Ltd 927
certain outcomes. Specifically, I draw on the insight from prospect theory that citizens are prone to a number of
psychological biases leading them to prefer certain outcomes to risky outcomes (risk aversion) and to have a
stronger preference for avoiding losses than for acquiring gains. In doing so, the article contributes to extant
research by examining the relevance of key expectations from prospect theory in a public sector setting. Several
studies draw on insights from prospect theory without considering in greater detail the relevance of prospect theory
to a public sector setting (e.g. Vis and Van Kersbergen 2007; Dull 2009; Moynihan and Lavertu 2012; Bewan and
Wilson 2013; Nielsen and Moynihan 2017). However, the public sector differs in important respects from the sce-
narios originally covered by prospect theory. Important in this respect, some studies suggest that the presence and
strength of the biases depend on the context that the outcomes relate to (e.g. Hershey and Schoemaker 1980;
Leclerc et al. 1995).
Moreover, the article suggests an empirical design to examine under what conditions citizens prefer reforms
with uncertain outcomes to reforms with certain outcomes. Specifically, the hypotheses are tested in a randomized
between-subjects population-based survey experiment with 1,395 responses from a representative sample of Dan-
ish citizens and two experiments with 1,680 US MTurkers. In all experiments, respondents were asked to choose
between two reforms of public services; one with a known outcome and one with a probabilistic outcome. I experi-
mentally manipulate whether the reform is expected to lead to gains or losses in various outcomes.
In the next section, I present prospect theory with a particular emphasis on four common characteristics of
human decision-making identified in this framework: risk aversion, asymmetry of risk aversion in gain and loss
domains (also known as the reflection effect), loss aversion, and probability weighting. I then discuss the application
of prospect theory to public sector outcomes. This is followed by a presentation, discussion, and analysis of my
experiments. The analysis produces a consistent pattern across contexts: citizens to a large extent prefer certain to
probabilistic reforms and are more willing to take risks if reforms are associated with gains rather than losses. The
latter finding is in outright opposition to the expectation that people are loss averse, and the article therefore con-
cludes by discussing what can explain this deviation from what has sometimes been described as an effect that, by
behavioural standards, is exceptionally large and reliable(Lerner and Keltner 2001, p. 148) as well as a discussion
of the limitations of the current study and guidelines for future research on the topic.
2|PROSPECT THEORY AND DECISION-MAKING BIASES
Acknowledging that expected utility theory a core element in rational choice theory and hence of relevance to
both public administration and political science continually failed empirically, Kahneman and Tversky (1979) devel-
oped prospect theory as a descriptively more correct theory of decision-making under risk. Risk is here understood
as the probability that an event takes place times the impact of the event (Vis 2011). Central to prospect theory is
the idea that people are prone to a range of decision-making biases that affect their preferences and behaviour.
Prospect theory does not attempt to explain why such biases occur but is rather a description of biases that are
found to affect decision-making in behavioural experiments. With its background in economics, prospect theory is
particularly concerned with examining under what conditions people prefer to take risky decisions to potentially
achieve a better economic outcome than if a more safe choice is made. However, prospect theory has also been
applied widely beyond economic decisions. Insights from prospect theory have been used to explain, for instance,
the choice between political candidates and how to vote in political referendums (Quattrone and Tversky 1988),
why people take part in collective action (Fanis 2004), the effects of governance models on performance (Bewan
and Wilson 2013), election administratorspreferences for e-voting technology (Moynihan and Lavertu 2012), stra-
tegies pursued by managers in change situations (Jawahar and McLaughlin 2001), why political leaders pursue risky
reforms (Vis and Van Kersbergen 2007), and whether politicians are more concerned about either policy or votes
(i.e. basing their decisions mostly on one of these dimensions) when making decisions (Linde and Vis 2017).
928 BAEKGAARD

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