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Diplomacy: Exploiting loss aversion

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COMMENTS

19 February 2010 16:03

It's Friday afternoon, a good time to float wacky ideas.

If I had to nominate two intellectual trends that have influenced me over the last few years, I would pick (a) resilience theory, which I touched on this morning, and (b) behavioural economics. The first of these is of ready application to various streams of international policy thinking, including economics, disaster response and terrorism.

Behavioural economics is different in that it has changed the way I view the everyday world and how people behave in it, but I'm yet to find a really compelling way to apply it to international policy.

Which brings me to my wacky idea. Back in December I made the argument that the incentives offered to North Korea to stop its nuclear program were just not enticing enough. But I now wonder if bribery is really the right strategy anyway.

One rule of thumb among behavioural economists is that people tend to work harder to prevent losses of what they already have than they will to get something they don't yet have. Put another way, they place higher value on potential losses than potential gains.

It's called loss aversion, and it leads me to think that bribing North Korea with stuff they don't yet have might not be the smartest approach.

The regime possibly imagines that life would be better (and the regime more secure) if the country had a couple more nuclear reactors supplied by the West. But the country has survived this long without them, so the incentive is not particularly strong, particularly if it means giving up nuclear weapons in return.

What if, instead, we simply offered North Korea goods with no political strings attached. The key here is that these goods would need to be consumable in some sense, so that they could be used for a time but then depreciate or just disappear. Nuclear power reactors might work in this context, if the North Koreans are forced to turn to the West for supplies of fuel.

What we would be playing on here is, to quote the Wikipedia page on loss aversion, 'the buyer's tendency to value the good more after he incorporates it in the status quo'. Once regular supply of electricity or better consumer goods become part of North Korean life, they are harder to live without. And if it is in the West's power to cut off such privileges, well, that's leverage.

Clearly such a strategy would take years to pay off, and would face severe domestic opposition in the US and Japan. But on the other hand, it would be relatively easy to sell to China. Thoughts? 

Photo by Flickr user aemkei, used under a Creative Commons license.

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