Loss Aversion, Framing, and Bargaining: The Implications of Prospect Theory for International Conflict

Abstract

Prospect theory deviates from expected-utility theory by positing that how people frame a problem around a reference point has a critical influence on their choices and that people tend to overweight losses with respect to comparable gains, to be risk-averse with respect to gains and risk-acceptant with respect to losses, and to respond to probabilities in a non-linear manner. This study examines these and related observed anomalies in expected-utility theory, summarizes how prospect theory integrates these anomalies into an alternative theory of risky choice, and explores some of the implications of prospect theory for international conflict and for bargaining and coercion in particular. One hypothesis is that political leaders of adversarial states behave differently when they are bargaining over gains than when they are bargaining over losses. Another is that crisis behavior may be more destabilizing than commonly predicted by rational choice theories because leaders are less willing to make concessions and more willing to risk large losses in the hope of eliminating small losses altogether.