Prospect Theory and International War

Introduction

International conflict can be “conceived as a set of interactive and interdependent decision problems that arise within the context of world politics” (Stein, 2002, p. 292). Experts in different fields have all contributed to the field of international conflict. Though it would seem to be dominated by political scientists, the truth is that significant contributions have been made from all fields of study. Game theory from economics, role of hormones (e.g., testosterone) in decision making and aggression levels, role of sex (e.g., male vs. female) in conflict styles, and prospect theory from cognitive psychology rooted international relation theorist. This being but just a few of the many more.

The empirical expansion of theoretical models for practical use is extremely important to the area of international conflict (De Mesquita, 1980). One such model is prospect theory. The following is an introduction to prospect theory and its relation to human motivation as well as the endowment effect and its relation to human decision making. In an attempt to understand the implications of these theoretical concepts, we will examine the Palestine-Israel conflict using prospect theory.

Prospect Theory

Prospect theory posits that decisions are made in relation to reference points (i.e., reference dependence). For example, people choose differently, in risky decision making situations, depending on the type of change (i.e., gain or loss)and degree of certainty to that change. There are two general paths from the total of four general possibilities. First, people are risk averse with respect to gain. Second, people are risk seeking with respect to loss. From these two general trends various principles can be derived. First, people value the thing they already have. Second, loss is experienced as a greater trauma than gain is experienced as a benefit (even if at the same net amounts). This greater trauma, a loss, is avoided by actors in risky decisions (i.e., loss aversion). The trend of loss aversion was aptly defined by Kahneman, Knetsch, and Thaler (1991) as the pattern that “the disutility of giving up an object is greater than the utility associated with acquiring it” (p. 194). Third, risk orientation is dependent upon gain or loss as opposed to net amount of change. Fourth, should there be a shift in reference point there is a change in how changes are perceived (e.g., framing effect).

A definition offered by an expert scholar in the field explained that,

Prospect theory posits that individuals evaluate outcomes with respect to deviations from a reference point rather than with respect to net asset levels, that their identification of this reference point is a critical variable, that they give more weight to losses than to comparable gains, and that they are generally risk-averse with respect to gains and risk-acceptant with respect to losses” (Levy, 1992, p. 171).

As a means to understand prospect theory within its field, we can conceptualize it as a theoretical response to expected utility theory because it seeks to answer the areas lacking in explanation. It can also be seen as an revision of a rational choice model because it seeks to continue analyzing risky decision in terms of rational actors making informed decisions; however, it shifts the focus from the net assets to the perception of change within the context of the decision in relation to a reference point. This focus on the reference point is critical to a practical carry over for prospect theory into international conflict. Kahnemean and Tversky (1979) pointed out that the reference point is not always the status quo but rather that it is dependent upon the relative context.

De Mesquita (1980), though commenting on his own expected utility theory that came as a forerunner to prospect theory, explained that a proper understanding of actor expectations and value prioritizations can help in better predicting outcomes of policy changes and alliances in relation to major conflict development. Particularly interesting about his theory is the classification system for state actors according to their respective capabilities and perceived interests. Levy (1997) added that though prospect theory has become difficult for a certain segment of scholars to accept, it has been overwhelmingly useful in raising new questions about the issues and methods of analysis used in risky decision making, concerning international relations.

Endowment Effect

An extension of the above mentioned general trends is the endowment effect. The endowment effect is an elaboration of how an actor handles the consequences, in terms of renormalization, of a risky decision that would either cause gain or loss. The bottom line of the endowment effect is that renormalization is easier with instant gains than with losses.

Kahneman, et al (1991) define the endowment effect, from slightly a different perspective, as the pattern that “people demand much more to give up to give up an object than then they would be willing to pay to acquire it” (p. 194). This bias towards valuing items in possession has an influence on decision making. Based on this bias, Kahneman et al (1991) referenced the need to shift from a focus on a stable preference order to a situational reference levels. This means that contextual factors that affect the perceived value of consequences, gains or losses, are more significant than historical patterns. Huck, Kirchsteiger, and Oechssler (2003) claim that the endowment effect improves an actor’s bargaining position in bilateral negotiations by safekeeping current net asset levels. Huck et al argued that the endowment effect makes evolutionary sense. They stated that “individuals with an endowment effect end up with more resources and therefore higher fitness” (p. 13)

 

Application and Analysis

One of the most widely known and thoroughly studied conflicts is the Palestine-Israel conflict. The Palestine-Israel conflict stems back to the late 19th century when the Zionist movement began an aggressive campaign to control the Palestinian lands and establish a wholly Jewish state (Jews for Justice in the Middle East, n.d.). The problem with this objective was that Palestine was already home to more than 700,000 Palestinian Arabs as of 1919 (Jews for Justice in the Middle East). This fact voids the fictitious Zionist slogan of Palestine being a “land without a people for a people without a land” and establishes the reason for the violent resistance of the indigenous inhabitants (i.e., Palestinian Muslims & Christians).

There are challenges to applying prospect theory to real-world problem-solving despite the relative ease of conceptualizing loss aversion as a real dynamic in decision making in risky situations. The first of three is the differences between individual decision-making and state decision-making. The second challenge, an extension of the first, is that collective risk assessment is different between individuals and the nation-state. The final challenge is the difficulty in explaining national renormalization; renormalization being the critical period of adjusting to consequences from a risky decision. Particularly interesting to this concept is the idea that decision-makers will be less likely to take action, after a loss, unless it is fully restoring the status quo. However, it is expected that the following discussion of the Palestine-Israel conflict will show how these challenges are not as significant as they would seem and can be minimized.

Having cleared the theoretic challenges to applying prospect theory, it must be made understood that prospect theory is useful in analyzing the Palestine-Israel conflict and it will have a practical and beneficial role in being applied to state-level decision-making. The first issue is that the state tends to favor processes that maintain the status quo. In addition, the concept of loss aversion is significantly practical in explaining the tendency for territorial defense receiving great weight than territorial acquisition

Framing is an essential aspect of political support bases. It is vital in forming public support for or against a new or change in policy (e.g., Israeli settlement expansion vs. Palestinian Intifada). Frames above the status quo define the change as a loss while frames below the status quo define it as a gain. This difference in defining greatly impacts whether the support base will be willing to back risky decisions or new policies (i.e., gain vs. loss). Significantly important to national and international negotiations, a decline in relative power is perceived as a loss. If a loss is experienced, and the action being decided will not fully restore the status quo then it is avoided (e.g., significant reduction in militant operations conducted by Palestinian freedom fighters). These dynamics tend to create a cycle of inaction that creates further losses, greater conflict, and no beneficial agreement. The current deterioration is clear proof of this happening in the conflict.

The Palestinian people’s biggest failure in preventing the theft of their land was their lack of establishing a sovereign state after the overthrow of Ottoman control in the region (Ozdogan, n.d.). This is why any resolution attempted must be clear, formal, and crystallized before and during its implementation plans. However, a plan requires cohesive leadership making informed decisions.

The state of Israel was founded on land taken away unlawfully from the Palestinian people. This issue is the central issue at hand: perceived losses, historically by Jews and currently by Palestinians, by both parties. The nation has progressively used various reasonings to take more and more land (e.g., Six Day War, settlements; Hagopian, 2004).This is supported with the 1915-16 Husain-McMahon agreement and the League of Nations Covenant (specifically Article 22, paragraph 4). In the 1915-16 Husain-McMahon agreement Britain promised an independent Arab state of Greater Syria in return for Arab revolt against Ottomans and Germans (Hagopian, 2004). However, British and French colluded to split up Greater Syria between themselves in the 1916 Sykes-Picot agreement (Hagopian, 2004). These facts not only indicate the illegal land acquisition but the contradictory, if not treacherous, relations European powers had with the Palestinians and Arabs in general. The extent of the land acquisition due to Jewish colonization has been documented by varying organization throughout the international community.

This quest for land was fueled by the Zionist ideology, especially its politicized variation. Political Zionism (which was secular and political in nature) was dominant over cultural Zionism (which focuses on religious and cultural strengthening) and its adherents had explored other lands such as Libya, Cyprus, and Uganda as Jewish homeland (Hagopian, 2004). The Balfour Declaration served as the official embracement of Zionism by the British government (Hagopian, 2004).

In 1947 there were plans on portioning the Palestinian lands between the indigenous populations and the Jewish colonizers (Hagopian, 2004). The 1947 partition plan was an unfair distribution of land that benefited the Zionist state of Israel at the expense of the Palestinians (Hagopian, 2004). Hagopian stated that

The best lands were incorporated into the Jewish state where Palestinians had citrus and cereal production areas, their main exports. Moreover, 40% of Palestinian industry and the major sources of the country’s electrical supply fell within the envisaged Jewish state. The plan also left Palestinians without air access, or harbors and port facilities, except for isolated Jaffa. (pp. 11-12).

The persecution of the Palestinian people at the hands of Jewish colonization was evident. The president of the United States , Wilson, was warned by the King-Crane Commission of 1919 (as quoted in Hagopian, 2004), “that increasing colonial immigration of Jews from Europe into Palestine would deprive the indigenous people of their right to self-determination and would destabilize the situation in the country and thus endanger Palestinian lives” (p. 4).

It’s also clear that the Israel does not feel the need to adhere to international law and give the rights to Palestinian refugees. Hagopian (2004) cites the United Nation General Assembly Right to Return resolution (i.e., resolution 194 [III]). This resolution called for the return of refugees as well as just compensation “for loss of, or damage to property which, under principles of international law or in inequity, should be made good by the Governments or authorities responsible” (as quoted in Hagopian, 2004, p. 13). Mark notes that “the Israeli government claim that allowing Palestinians to return back to their homes left in 1947-48, and 1967 wars will destroy the Jewish nationality of the Israel state” (as cited in Ozdogan, n.d.)

In conclusion, we can see how loss aversion was a significant driving factor in extreme Palestinian resistance early in the conflict, endowment effect was a significant factor in Israeli protection of settlements, and how both sides frame any concession as a loss (to the status quo) that cannot be. If it were that both sides reframe their assessment of the situation and find alternative methods of negotiation, as opposed to the a zero-sum game approach, there might be progress made on a two-state solution that serves the interests of all parties. It the authors opinion that Levy (1997) was correct in his assertion that prospect theory’s contribution is of providing a new set of questions to ask from the same set of data; providing a new prospective and new results.

 

References

De Mesquita, B. B. (1980). An expected utility theory of international conflict. The American Political Science Review, 74(4), 917-931.

Hagopian, E.C. (2004). The Palestine-Israel conflict: A short history. Unpublished manuscript, Simmons College, Boston, MA.

Huck, S., Kirchsteiger, G., & Oechssler, J. (2003). Learning to like what you have: Explaining the endowment effect. Bonn Econ Discussion Papers. Bonn Graduate School of Economics, University of Bonn, Germany.

Jews of Justice in the Middle East. (n.d.). The origin of the Palestine-Israel conflict (3rd ed.).[Brochure]. Retrieved on June 24, 2008, from http://www.cactus48.com/truth.html

Kahneman, D., & Tversky, A. (1979). Prospect theory: An analysis of decision under risk. Econometrica, 47(2), 263-292.

Kahneman, D., Knetsch, J.L., Thaler, R. (1991). Anomalies: The endowment effect, loss aversion, and the status quo bias. Journal of Economic Perspectives, 5(1), 193-206

Levy, J. S. (1992). An introduction to prospect theory. Political Psychology, 13(2), 171-186.

Levy, J. S. (1997). Prospect theory, rational choice, and international relations. International Studies Quarterly, 41(1), 87-112.

Ozdogan, A. (n.d.). The dispute over the Holy Land: Palestine-Israel conflict. Unpublished manuscript, American University, Washington, DC.

Stein, J. G. (2002). Psychological explanation for international conflict (pp-292-308). In Walter Carlsaes, Thomas Risse, and Beth A. Simmons (eds.) Handbook of International Relations. Thousand Oaks, CA: Sage Publications.

Zhang, Y., & Fishback, A. (2005). The role of anticipated emotions in the endowment effect. Journal of Consumer Psychology, 15(4), 316-324.

 

 

 

~ by yusufmendez on June 11, 2014.