Prospect Theory and Taiwan Crises.

How best to avoid a possible crisis over Taiwan, which might escalate into the most unwanted war of this century? Traditional studies of Taiwan crises focus mainly on a rational choice theory of deterrence. However, they fail to account for risk-taking behavior that seems irrational but can be well explained by prospect theory. This paper employs prospect theory to explain China's different policies toward Taiwan under Jiang Zemin and Hu Jintao. By using regime security as a reference point to define the domains of action, we suggest that Chinese leaders are more likely to use military coercion, a more risky policy, against Taiwan's pro-independence movements when they are in a domain of losses, i.e., when their regime security faces serious domestic and international challenges. On the contrary, Chinese leaders are more likely to employ political pressure, a less risky policy, to oppose Taiwan's pro-independence forces, if their decision making takes place in a domain of gains, i.e., when their regime security is insured. We conclude that maintaining a good U.S.-China relationship is the best strategy for the United States to avoid military crises in the Taiwan Strait. ..PAT.-Unpublished Manuscript [ABSTRACT FROM AUTHOR]