Thucydides as prospect theorist (handout)

Josiah Ober (jober@stanford.edu).

http://papers.ssrn.com/sol3/papers.cfm?abstract_id=1431169

Abstract: Opposing the tendency to read Thucydides as a strong realist, committed to a

theory of behavior that assumes rationality as expected utility maximization, Ned Lebow
and Clifford Orwin (among others) emphasize Thucydides attentiveness to deviations from
rationality by individuals and states. This paper argues that Thucydides grasped the
principles underlying contemporary prospect theory, which explains why people over-
weight potential losses. Thucydides offers salient examples of excessive risk-aversion and
excessive risk-seeking by decision-makers variously faced with high or low probabilities of
losses or gains. Thucydides shows that leaders rhetoric can limit or exacerbate the political
effects of bias in risk assessment.

Human nature: Thucydides is concerned, with the question of how individuals and
states can be expected to behave, both in ordinary and in extraordinary
circumstances. Human behavior is conditioned by human nature, in ways that may
be modulated by specific political regimes, but that ultimately transcend all regimes
(Orwin 1994 10-11). Likewise, behavioral economics seeks to explain regularities in
human behavior.

Rationality and its limits: Thucydides Athenian Thesis: individual and state
interests take priority over considerations of justice. Yet individual and collective
agents often fail to identify the course of action that would best serve their interests.
Prospect theory helps explain why individual and collective agents so often fail to
identify the course of action that would best serve their interests. Kahneman and
Tversky showed that Humans (that is, actual people), unlike Econs (the hypothetical
choice-makers of economic theory) do not behave according to expected utility
maximization when assessing probabilities. Humans make their judgments (and act
accordingly) based on prospective utility rather than on expected utility. As a
predictable result, when Humans consider uncertain prospects they stray from the
course of strict rationality, typically in the direction of over-weighting potential
losses relative to fixed costs.

Key passages from Thucydides illustrate the basic premises of prospect theory:
narratives of the Melian Dialogue and Sicilian Expedition Debate in books 5 and 6,
the Corinthian assessment of risk-seeking Athens and risk-averse Sparta in book
1.68-71, and the analysis of Pericles leadership and rhetoric at 2.65.

Four-fold pattern of the Certainty effect (when faced with the prospect of highly
probable gains) and the Possibility effect in the face of the prospect of very low
probability gains and losses, predicts when Humans will act irrationally by
accepting unfavorable settlements or rejecting favorable settlements. The paper
considers passages from Thucydides illustrating each of the four box in the Table.
 Gains Losses

1. Likelihood of big gain 1. Likelihood of big loss

High 2. Fear of disappointment 2. Hope to avoid loss
probability 3. Risk averse 3. Risk seeking
Certainty 4. Accept unfavorable 4. Reject favorable settlement
effect settlement (over-insure)
Sicilian Expedition Debate Melian Dialogue

1. Slight chance of big gain 1. Slight chance of big loss

Low 2. Hope of gain 2. Fear of loss
probability 3. Risk seeking 3. Risk averse
Possibility 4. Reject favorable settlement 4. Accept unfavorable
effect settlement (over-insure)
Athenians (per Corinthians) Spartans (per Corinthians)

Table. Emotions, behavior, and attitudes under uncertain prospects: the four-fold
pattern. After Kahneman 2011 317. 1 = prospect. 2 = focal emotion evoked by
prospect. 3 = how most people behave. 4 = expected attitude. Examples from
Thucydides in italics.

Example: The Melian dialogue provides a case study of how Thucydides explores
the difference between the expectation principle and choices made in the face of
uncertain prospects. Offered a choice between a tiny chance to keep everything
(avoiding all loss) and the certainty of high costs (losing a lot but not all), the
Melians, like most people (according the experimental evidence) irrationally chose
to gamble on the tiny chance of avoiding the great loss. As Kahneman (2011 318-19)
notes: people who face very bad options take desperate gambles, accepting a high
probability of making things worse in exchange for a small hope of avoiding a large
loss. Risk taking of this kind often turns manageable failures into disasters. The
thought of accepting the large sure loss is too painful, and the hope of complete
relief too enticing, to make the sensible decision that is time to cut ones losses.
This somber assessment exactly describes the Melians situation, their decision, and
its consequences. Thucydides careful reader will be ready to anticipate that
eminently Human failure of reason; the Athenian envoys on Melos, unable to break
out of their habit of reasoning as Econs, and expecting others to behave likewise, do
not. The tragedy of Melos is driven by the mismatch between these two forms of
reasoning. Thucydides, I argue, clearly understood both.

Kahneman, Daniel. 2011. Thinking, fast and slow. New York: Farrar, Straus and
Giroux.
Orwin, Clifford. 1994. The humanity of Thucydides. Princeton, N.J.: Princeton
University Press.