This is a topic of interest that will support my research into solving environmental conflicts. When looking at environmental conflicts, there is a stream of literature that applies Prospect Theory to how parties to a conflict frame their participation, and that of others. This article examines the theory and its implications for stakeholder disputes. 

Prospect Theory 

Prospect theory was proposed by Kahneman & Tversky (1979) in reaction to data they observed that seemed to contradict expected-utility theory of choice under risk (NB: “Prospect” can be thought of as another word for “gamble.”). Expected-utility theory holds that, when faced with choices that have a component of risk, individuals will weight the utility of each choice by its probability, and make the rational choice of the one with the highest remaining value. Kahneman & Tversky found data that contradicted this theory, showing rather that decisions made under risk are not “rational” in the sense of expected-utility theory, but are instead driven by perceptions that vary with how the information is presented. This has dramatic implications for framing-based contexts because of the role that communication plays in decision-making. 

Levy (1993, pp. 174-9) provides an outstanding and oft-cited summary of the main points of prospect theory and I will rely on his outline for my analysis: 

(1) “People tend to think in terms of gains and losses rather than in terms of their net assets, and therefore encode choices in terms of deviations from a reference point.” 

(2) “People treat gains differently than losses in two respects. First, individuals tend to be risk-averse with respect to gains and risk-acceptant with respect to losses.” 

(3) “Gains are also treated differently than losses in that ‘losses loom larger than gains.’” The endowment effect holds that people place incremental value on what they already have, simply because they have it in their possession. The loss aversion effect holds that people prefer not losing than to winning; they place greater attention on losses. Similarly, actual losses are perceived as more important that opportunity costs of potential (but unrealized) gains.

(4) “Because of the encoding of outcomes in terms of a reference point and the differential treatment of gains and losses, the identification of the reference point, or framing of a choice problem, becomes critical.” 

(5) “A number of studies have shown that individuals overweight outcomes which are certain relative to outcomes which are merely probable-the certainty effect...” 

(6) “There is also evidence that in order to simplify the choice between alternatives, individuals often disregard components that are common to each alternative option, and focus on components which are different... This isolation effect (or cancellation) can lead to different preferences because there may be more than one way to decompose prospects into shared and distinctive elements...” 

Implications for Stakeholder Disputes

For my research, the implication of prospect theory lies in its ability to determine communication content will drive reframing of stakeholder frames in the context of a conflict.

Certain Negatives

Prospect theory has been demonstrated to have relevance to conflict negotiation, and the primary consideration in this regard is to remember that the party who deals most effectively with the certain negatives of any conflict will stand a much better chance of persuading others. Curseu & Schruijer (2007) refer to negativity bias, which says the human cognitive ability is highly attuned to information with a negative frame. 

“…the human cognitive system seems more prepared to mobilize resources in order to process negatively framed information… Groups are more willing to allocate external resources, and to get personally involved in solving an issue framed as danger as compared to dealing with an issue framed as a problem or an opportunity… (Curseu & Schruijer, 2007, p. 348).” 

Multiparty Negotiation 

Economics literature shows skepticism whether prospect theory applies to multiparty contexts – as opposed to the original research on individual cognitive choices. Negotiation and political science literature has no such doubt. Curseu & Schruijer (2007) confirm the framing effect from prospect theory in a multiparty negotiation. Similarly, Bazerman (1983), De Dreu, et al. (1994), McDermott (2009) and Hancock, et al. (2010) all find that prospect theory can be used as a framework for risky decision-making in multilateral negotiations, and it can be a predictor of dispute outcomes. 

Philosophy of Prospect Theory 

Leveraging the work of Dewulf, et al. (2009) on the philosophical underpinnings of framing research, the cognitive (as opposed to interactional) approach will be the most appropriate to my analysis. This approach is appropriate for framing, as discussed above, and it also supports prospect theory. “…frames are cognitive heuristics that people use to interpret a situation. (Dewulf, et al., 2009, p. 167).” 

Conclusions 

To this point we have seen that framing demonstrates the anatomy of how environmental conflicts develop and become intractable, and now we see that prospect theory can increase the effectiveness of a framing analysis by helping to fine-tune the context in which the risky decisions involved in the dispute are presented to and by the parties involved. Prospect theory predicts individual behaviour in decision-making under risk, and has been demonstrated to apply in multiparty contexts as well. 

References 

Bazerman, M. H. (1983). Negotiator Judgment: A Critical Look at the Rationality Assumption. The American Behavioral Scientist, 27(2), 211–229.

Curşeu, P. L., & Schruijer, S. (2007). The Effects of Framing on Inter-group Negotiation. Group Decision and Negotiation, 17(4), 347–362. De Dreu, C. K. W., Carnevale, P. J. D., Emans, B. J. M., & Van De Vliert, E. (1994). Effects of Gain-Loss Frames in Negotiation: Loss Aversion, Mismatching and Frame Adoption. Organizational behavior and human decision processes, 60, 90–107.

Dewulf, A., Gray, B., Putnam, L., Lewicki, R., Aarts, N., Bouwen, R., & van Woerkum, C. (2009). Disentangling approaches to framing in conflict and negotiation research: A meta-paradigmatic perspective. Human Relations, 62(2), 155–193.

Hancock, L. E., Weiss, J. N., & Duerr, G. M. E. (2010). Prospect theory and the framing of the Good Friday Agreement. Conflict Resolution Quarterly, 28(2), 183–203. 

Kahneman, D., & Tversky, A. (1979). Prospect Theory: An Analysis Of Decision Under Risk. Econometrica: Journal of the Econometric Society, 47(2), 263–292. 

Levy, J. S. (1993). An introduction to prospect theory. Political Psychology, 13(2), 171–186. Retrieved from 

McDermott, R. (2009). Prospect Theory and Negotiation. In G. Sjöstedt & R. Avenhaus (Eds.), Negotiated Risks: International Talks on Hazardous Issues (pp. 87–109). Berlin, Heidelberg: Springer Berlin Heidelberg.