Why did so many fragile Latin American democracies introduce brutal neoliberal reforms during the late 1980's and 1990's? Despite the risks of these reforms, why did they obtain such high levels of popular approval? And what accounts for the differential pace in which governments implemented these reforms? These are the puzzles Kurt Weyland tackles in his ambitious comparative political study The Politics of Market Reform in Fragile Democracies.

Yet Weyland does so with a theoretical agenda in mind. Over the past two decades the rational choice paradigm has risen in prominence in political science. However, this has occurred while economists have incorporated correctives to this decision-making model, correctives first made by cognitive psychologists in the 1970's and 1980's. The result is a theoretical lag in which political scientists are using an outdated decision-making model with weaknesses acknowledged by economists and psychologists alike. Weyland's agenda thus consists of using new decision-making theories to answer important questions about the politics of economic adjustment. Arguing for the inadequacy of economic structural, political institutional, ideational and classic rational choice models to account for Latin America's recent adjustment politics, Weyland proposes an alternative explanation grounded in Prospect theory. Inspired by the work of two cognitive psychologists, Daniel Kahneman and Amos Tversky, Prospect theory offers a critique of two fundamental assumptions of expected utility, the model upon which rational choice decision theories are built. First, expected utility theory assumes that given a choice, people calculate and opt for the one that offers the highest absolute value. For example, given the option of a 50% chance of winning $220 or a sure gain of $100, expected utility predicts that the 'rational' person would choose the gamble. Second, rational choice assumes decreasing marginal utility. For instance, the utility of an additional dollar if you only have one in the bank is higher than the utility of an extra dollar if you have already saved a thousand.

In contrast, Prospect theory argues that people make choices based not on absolute value, but on the perception of gains and losses given a reference point. In other words, choices and attitudes toward risk depend upon context. When people see themselves in the domain of losses, they become more risk-acceptant; when they see themselves in the domain of gains, they become more risk-aversive. For example, which would you prefer, a sure gain of $100 or 50% chance of winning $220? Prospect theorists find that many people contradict cost-benefit analysis and prefer the sure gain, even though the expected value of the bet (50% x $220 = $110) is higher than the guaranteed $100 gain. People thus become risk-aversive when in the domains of gains. Answers change, however, when the question is contextualized in terms of losses. Which would you prefer, a sure loss of $100 or a 50% chance of losing $220 and a 50% chance of losing nothing? When the decision is framed in this way, people become more risk-seeking and prefer the gamble, hoping not to incur any losses, although the expected value of the loss is lower at -$110. But what do these cognitive psychological experiments have to do with the politics of adjustment?

A lot, claims Weyland. When citizens find themselves in the domain of losses, they become more risk-seeking and thus become more motivated to accept uncertain policies, such as the market reforms that swept through Latin America in the late 1980's and early 1990's. This, argues Weyland, was the case in Peru, Argentina and Brazil, all of which faced severe hyperinflation and economic instability. In times of crises, their electorates chose risky leaders, many of whom were political outsiders, to implement drastic economic policies. In comparison, the electorate in Venezuela, a nation in which people did not see themselves in economic crisis, opted for a partial political outsider and coolly received market reforms. The key difference in the two cases is that in Peru, Argentina, and Brazil the electorates were more risk-seeking because they saw themselves in the domain of losses, while in Venezuela voters saw themselves as partially in the domain of gains and thus were reluctant to support drastic economic measures.

But what happens after the implementation of market reforms? Weyland argues that although the courses these four nations took diverge, the principle of risk-aversion in the domain of gains and risk-seeking in the domain of losses continues to explain the politics of adjustment. Brazil and Venezuela found themselves moving in and out of the domain of losses and gains, thanks in part to the scandals that removed their respective leaders from office. Meanwhile, Argentina and Peru continued to achieve economic stability throughout the 1990's. The success of these reforms placed these two countries in the domain of gains and thus led them to become more risk-aversive. By the end of the decade, the broad outlines of market reform, despite notable opposition, were broadly accepted in both countries. The ability of a Prospect theory model to explain the often tortuous and mercurial market reforms in a comparative regional perspective allows Weyland to generalize his model to other nations, especially those in Africa and Eastern Europe which faced a similar period of market adjustment. Furthermore, Prospect theory also provides him with a unique theoretical intervention that enables him to mediate between a methodological individualism and more structural and functional approaches.

While Weyland ingeniously generalizes a cognitive psychological finding to the level of political decision-making in order to explain the politics of adjustment, his argument relies on certain post-hoc criteria. As he himself states, while one can define payoffs and probabilities for a gambling choice experiment, it is more difficult to do so when one has to determine what the payoff is for supporting or opposing leaders and their policies. He thus argues that determining to what extent people's decisions deviate from expected utility cannot be proven but only be made plausible. No doubt, Weyland has given a plausible defense. His argument seems to turn, however, on a more fundamental aspect: crisis. The key to determining whether a nation is in the domain of gains or losses is the ability to judge whether or not they are in 'crisis.' If they are, they are more risk-seeking; if they are not, they are more risk-aversive. Yet Weyland's definition of crisis remains loose. What is more important--a subjective perception of crisis or an objective measure of it through an inflation figure or the like? How do perceptions of crisis differ in cases of price indexation, such as in Brazil which used the measure as compared to Peru which did not? Without more specific definitional criteria for crisis, Weyland's litmus for sending a nation into either losses or gains is ultimately left to his judgment.

This is not to discount Weyland's argument. Rather, we still do not know how valid or robust his claims are because the tipping point, which determines the domain of losses or gains, remains underspecified and thus susceptible to post-hoc theorizing. Regardless, the study demonstrates the novel and potentially innovative findings that can result from importing the new understandings of rational choice that economists and psychologists have developed over the past twenty years. If Weyland's theoretical gamble is correct, rational choice may be entering the domain of losses, and Prospect theory may be moving the discipline toward a domain of gains.

Matthew Bird, The University of Chicago

Back to top