Prospect theory and Crimea

In this week’s session of my class on ‘Irrationality and Foreign Policy Decision Making’, we shall be looking at the psychology of risk, in an effort to determine why people and governments worry so much about unlikely dangers (e.g. terrorism) and not so much about likely ones (e.g. car crashes). Among the things we shall look at is Prospect Theory, so in this post I will briefly describe the theory and then apply it to the case of Russia’s annexation of Crimea in March last year.

A good way to understand Prospect Theory is to watch this BBC Horizon video:

The magician in the video gives some people £20 and offers them a chance to gamble. If they refuse, they keep the £20; if they agree to gamble, they have a 50% of winning an extra £30 and ending up with £50 and a 50% chance of losing the £20 and ending up with nothing. The magician frames the choices differently for another group. He gives them £50, but then takes away £30 and offers them a chance to gamble to get the £30 back. Again, the people can refuse, in which case they keep the £20 they have left, or they can gamble, in which case the odds, as before, are 50-50.

Mathematically, both scenarios are identical. The participants can either a) walk away with £20; or b) choose to gamble, in which case they have a 50% chance of ending up with $50 and 50% chance of ending up with zero. But most people in the first scenario refuse to gamble, whereas most people in the second one agree to. Why?

Prospect Theory says that the answer is that we do not think in absolute mathematical terms, but rather relative to some reference point. Our willingness to accept risk is dependent upon whether we consider ourselves in a gain or loss position compared to that point. Human beings are prone to ‘loss aversion’, and so if in a loss position will gamble to try and recoup their losses, but if in a gain position will not, because gambling could result in the loss of what they already have. In the first scenario people are in a gain position – they have gained £20. They are happy to cash in their profits, and reluctant to take a risk which could mean losing what they have. By contrast, those in the second scenario feel that they have lost £30, and so will take a risk in an effort to get it back.

Applied to international affairs, this would imply that states will be less likely to take risks in order to win something (power, prestige, territory, etc), and more likely to take risks in order to avoid losing it.

Many commentators have interpreted Russia’s annexation of Crimea as proof of Russia’s aggressive, imperialist instincts. The next step may be for Russia to expand further, both in eastern Ukraine and perhaps even in the Baltic states. Prospect Theory would suggest something different. Seizing Crimea was a gamble – Russia could not be certain that there would be no resistance, nor could it be sure what the reaction of the Western world and international financial markets would be. Moscow could not know what costs it would incur. Given this, it makes more sense under Prospect Theory if we consider Russian leaders not to have been trying to gain something but rather to have felt themselves to be in a position of loss, and so to be gambling in order to reduce their losses. The loss in question was the fall of a Ukrainian government which was favourably aligned with Russia and its replacement with one which was determined to move westwards and to seek EU and NATO membership. Russia, in a sense, had ‘lost’ Ukraine. It also very possibly feared losing its naval base at Sevastopol. Finding itself in this position, it took the gamble of seizing Crimea as a way of trying to cut its losses.

Prospect Theory, of course, only describes broad tendencies. While people are generally less risk averse when in a position of loss than in a position of gain, there are also people who will gamble in order to win something. Russia’s annexation of Crimea may be such a case. But it is more likely not to be. If not – and if Prospect Theory holds true – the annexation of Crimea does not necessarily suggest that Russia is intent on expanding still further, and negotiating a settlement in Ukraine will not encourage further aggression.

6 thoughts on “Prospect theory and Crimea”

  1. Russia didn’t ‘seize’ Crimea. Crimeans voted for independence from Ukraine in 1991, and voted to rejoin Russia in 2014. Both votes were legitimate expressions of popular will and are protected under the UN charter.

    Liked by 1 person

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