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Prospect theory is a concept from behavioral economics that has been applied to the study of foreign policy decision-making.

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Amos Tversky and Daniel Kahneman toast to their partnership in the 1970s.

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These two Israeli psychologists suggests that people evaluate potential outcomes based on perceived gains and losses relative to a reference point, rather than in absolute terms.

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Decision-makers assess outcomes relative to a reference point and tend to be risk-averse for gains but risk-seeking for losses. This means they are more willing to take risks to avoid perceived losses than to achieve equivalent gains.

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When facing certain gains, decision-makers are risk-averse and prefer to maintain the status quo, fearing potential losses if they change the current situation. In foreign policy, this might lead to a preference for maintaining peaceful relations rather than risking conflict.

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When facing uncertain outcomes, decision-makers tend to be risk-seeking for losses and risk-averse for gains. In foreign policy, leaders might take significant risks if they perceive the current situation as a loss, hoping for a better outcome despite the uncertainty.

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How a situation is presented or framed can influence decision-making. Leaders can be swayed by how a foreign policy issue is portrayed, emphasizing either the potential gains or losses, which can impact their decisions.

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People tend to overvalue what they already possess. In foreign policy, this could mean leaders overvaluing territories, resources, or alliances, leading to biased decision-making based on the perceived loss of these possessions.

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Decision-makers often consider the resources (like time, money, or lives) already invested in a situation, even if those costs are irrelevant to the current decision. In foreign policy, this might lead to persistence in failed strategies due to the unwillingness to acknowledge past losses.

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Reference points in foreign policy can be historical treaties, territorial boundaries, or past diplomatic relationships. Leaders evaluate potential gains and losses concerning these reference points, influencing their policy decisions.

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5 Lessons From a Diplomat for Bridging the Parent-Teacher Divide (Published 2017)

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Critics argue that prospect theory might oversimplify complex foreign policy decisions and that the framing of reference points can be subjective, leading to varied interpretations and predictions.

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Payment for insurance is the best-known prospect theory example. The insurance sector makes consumers loss-averse by overestimating the risk of undesirable outcomes. Due to this psychological phenomenon, they buy insurance to safeguard themselves, their families, their businesses, and their possessions. Indefinitely high monthly premiums seem illogical from a rational choice perspective. The insurance industry demonstrates that, assuming rational behavior in other areas of life, people are willing to pay lifetime premiums for the assurance of certainty that insurance companies provide.

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(n.d.). https://oxfordre.com/internationalstudies/display/10.1093/acrefore/9780190846626.001.0001/acrefore-9780190846626-e-281#:~:text=Prospect%20theory%20posits%20that%20when,non%2Dvalue%2Dmaximizing%20choices.

';;'. (2019, March 9). ';;' - YouTube. Retrieved October 21, 2023, from https://www.jstor.org/stable/3791682

Berejikian, J. D. (2016, February 25). Prospect Theory in International Relations - International Relations. Oxford Bibliographies. Retrieved October 21, 2023, from https://www.oxfordbibliographies.com/display/document/obo-9780199743292/obo-9780199743292-0163.xml

Lewis, M. (2016, November 14). How Two Trailblazing Psychologists Turned the World of Decision Science Upside Down. Vanity Fair. Retrieved October 21, 2023, from https://www.vanityfair.com/news/2016/11/decision-science-daniel-kahneman-amos-tversky

(n.d.). https://oxfordre.com/internationalstudies/display/10.1093/acrefore/9780190846626.001.0001/acrefore-9780190846626-e-281#:~:text=Prospect%20

Prospect Theory: an ‘S’ curve and the relatively muted joy of winning. (2021, February 15). Dream End State. Retrieved October 22, 2023, from https://www.dreamendstate.com/2021/02/15/prospect-theory-why-we-feel-losses-more-intensely-than-gains/

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US Newspaper Headlines during the Crisis

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A famous example of the usage of prospect theory in history, in the context of IR, is the 1962 Cuban Missile Crisis. During the Crisis, The US and The USSR were faced with the high-stakes stand-off regarding the placement of nuclear missiles in Cuba .

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Essentially, Prospect Theory argues that individuals don't always make rational choices, as traditional economic theories assume. Instead, they tend to weigh potential gains and losses according to their circumstances and biased perspectives.

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People are more sensitive to losses than to equivalent gains. In other words, the pain of losing $100 is greater than the pleasure of gaining $100.