A model for optimizing the economic behavior of countries in asymmetric power conflicts using game theory and prospect theory

After Kahneman and Tversky expanded the Prospect theory in the context of behavioral economics in year 1992, academic and policy making communities wondered as if the theory of expected valuation could solely explain the economic behavior of individuals and governments in different decision-making situations. This was further reinforced by the facts of the wars between Iraq and the United States (1990) or England and Argentina (1982) asking why is it that one country still decides to enter a direct war, despite finding itself economically and militarily weaker than the adversary. Behavioral economists have attempted to use the Prospect theory to explain these countries’ responds by providing a more accurate prediction of the behavior of many governments in opposition to powerful countries. In the meantime, the use of game theory due to its high modeling power regarding intelligent actors and their dynamic behavior has gained widespread use in combination with landscape theory. In this paper, we try to present the Prospect theory and the way it is combined with game theory in order to provide a model for the optimal explanation of Iran’s socio-economic behavior under sanctions.