Rationality, Prospect Theory and Economic Evaluations of the President.

The rationality assumption has guided a great deal of social science work. While useful, evidence for the assumption is mixed. Prospect theory has challenged the rational choice approach. Particularly, it has challenged the notion of invariance, where the description of the choice should not affect the outcome of the choice. One aspect of choice invariance is that symmetric losses and gains should be weighted equally in the decision making process. To wit, with rationality, the loss of a dollar is as bad as the gain of a dollar is good. But with prospect theory, we do not expect voters to weigh such information equally. Here, instead, actors are risk averse, as losses are more heavily weighted than gains. Citizens seem to be most likely to exhibit rationality in the aggregate. It is in the aggregate that we find public opinion moving sensibly and even prospectively. For example, in the context of public evaluations of political leaders, with rationality we would expect good economic conditions to help political leaders as much as bad economic conditions hurt them. But under prospect theory, we would expect bad economic conditions to diminish popularity faster than good economic conditions can build popularity. In our paper, we test the viability of rational choice versus prospect theory in explaining the American public’s presidential approval ratings given economic conditions. We argue that if rational choice assumptions are correct, bad economic conditions should diminish presidential popularity at the same rate as good economics conditions should build presidential popularity. But if prospect theory is correct, then bad economic conditions should hurt presidential popularity more than good economic conditions should help it. With monthly presidential approval data from the 1950 to the present, we use a Bayesian time varying coefficients model to examine whether the effect of the economic evaluations is greater in bad economic times than during good economic times. We find that the effect of the economy is indeed larger when the economy is performing poorly than when it performs well. The result is more than evidence for prospect theory, but also demands a rethinking of how the economy can affect presidents as policy-makers and politicians. [ABSTRACT FROM AUTHOR]