472NOT11.DOC September 8, 1996 Prospect Theory: Choosing To Cooperate Approaches To Cooperation Rational Choice: Maximization Of Subjective Expected Absolute Gain Or Loss Rational Choice: Comparison Of Relative Gain Or Loss Among Defensive Positionalists Relative Advantage In Arms Racing Is One Of The Motivating Factors In Fueling Arms Races. National Security Issues Are Framed As Relative Gain Problems And Thus Are Difficult To Resolve. That Is, Two Sides Tend To Cooperate When They Both Frame The Problem As Avoidance Of Loss Than The Maximization Of Gain. At Camp David Peace Talks In 1978, The Egyptian Delegation Behaved As Defensive Positionalists: The Delegation Took The Israeli Position As Its Reference Point And Argued That Because Israel Stood To Gain Too Much From The Accord, Egypt Could Not Accept The Deal Of Peace For The Sinai. Prospect Theory: People Worry More About Losses Than Gains. Consider The Term Papers You Are Writing. What If You Wished To Write 6 Pages A Day But Only Wrote 3 Pages? What Matters Is The Loss Of 3 Pages Because Your Reference Point Was 6 Pages Not The Gain Of Three Pages. Sadat Used As His Reference Point The Return Of Sinai Not How Much Israel Stood To Gain. Sadat Emphasized How Much He Stood To Lose From Not Making A Deal--He Looked At Losses From Failure To Agree And Thus Choose To Cooperate. Prospect Theory People Pay More Attention To Losses That Than To Gains: A Loss Is More Painful That An Equivalent Gain Is Desirable. More Painful To Lose $1,000 On South University Than It Is Pleasurable To Find $1,000. Loss Aversion: People Weigh Losses More Heavily Than Gains Endowment Effect: People Demand Much More To Give Up An Object Than They Would Be Willing To Pay To Acquire That Object. Endowment Effect: Enhances The Pain Of Giving Up Your Assets: Foregone Gains Are Less Painful Than Perceived Losses. Reference Points: May Serve As Perceptual Anchors--New Information Is Then Adjusted In Relationships To The Anchor. Anchoring: Makes People Insensitive To New Information. Heuristics: Anchoring, Availability, Representativeness, And Certainty Make It Hard To Revise Opinion Optimally And Thus Decrease The Chances Of Successful Deterrence. Loss Aversion: People Are Risk Averse With Respect To Gains And Risk Acceptant Regarding Losses.: They Are More Willing To Take Risks To Avoid Losses Than They Are To Make Gains. President Carter, Faced With Unattractive Choices In The Hostage Situation In Iran, Choose The Risky Rescue Mission To Avoid These Losses Ore Than The Anticipated Gains If The Mission Succeeded. Certainty Effect: People Will Choose A Sure Gain Rather Than Take A Chance On A Larger Gain That Is Only Probable. People Choose A Sure Gain Of $3,000 Over An 80% Chance To Win $4,000 ($3,200), Contrary To The Subjective Expected Utility Model Of Rational Choice. Deterrence: May Work Against An Adversary Who Frames A Problem As Maximization Of Gains, Does Not Anchor With Reference Points That Emphasize Losses Over Gains, And Does Not Overweight Highly Probable Events As Certain Ones.