The Causes of War: Implications for Organization Design & Development

One of the most important courses Julian Chender took in his Organization Design and Development journey was an undergraduate seminar at Swarthmore College on the causes of war. In it he studied Prospect Theory, an understanding of human behavior created by Daniel Kahneman and Amos Tversky in 1979.

Prospect Theory

The theory states that people see situations in terms of gains and losses, and not in terms of overall position as was previously thought. This means that someone with $110 who loses $10 playing cards will see himself as “having lost $10,” not as “having $100.”

This subtle shift in perspective has significant effect on our understanding of why people act as they do. As prospect theory shows, people are willing to accept considerable risks in attempt to gain back what they have lost but are risk-averse when faced with possible gains. This means that a gambler will risk more money in order to recoup his $10, and, when he loses that he will risk another $20. The reason behind this, Kahneman and Tversky discovered, is that losses hurt more than comparable gains feel good, which means that people are loss-averse. Because losing $10 is much more painful than gaining $10 is pleasurable, the gambler will risk more money in order to get back to the starting position, but once there will not risk nearly as much in trying to make gains.

The most important aspect of prospect theory, and the most applicable to the study of international relations and organization design and development, is the idea that a subject’s behavior depends on how they frame the situation. Each person presented with the same situation may frame it differently, and therefore have a different reference point. A reference point is the zero mark on someone’s scale, the place from which they see a change as either a gain or a loss. In the case of the gambler, the reference point is clear: it is the $110 with which they began the game. In more abstract situations, however, the reference point is not as easily fixed, and is subjective to each participant.

Prospect Theory and the Causes of War

A leader's reference point is the key to understanding their future behavior. Whether the prime minister of a nation, the CEO of a multinational corporation, or the executive director of a nonprofit organization, the subjective reference point of the leader will inevitably weigh on their decision making. This understanding allows us to see the world differently.

Prospect theory shows us that gambles are made to avoid losses. From the perspective of the causes of war seminar, this meant that the prevailing understanding of Iraq's 1990 invasion of Kuwait was not in fact a war of expansion, as popularly thought, but of risk aversion. Saddam Hussein saw the situation in terms of losses: Iraq’s economy was in serious decline and he believed that the only way to stop it would be to invade Kuwait. Iraq would not be able to recover if Kuwait did not forgive its massive debt and stop driving down oil prices by exceeding its OPEC production quota. This example shows that the way a state sees itself vis-à-vis its reference point is key to whether or not it will go to war: if it sees itself as being in the realm of losses it will fight, and if it sees itself as being in the realm of gains it will not.

One of the wars most widely seen as blatant expansionism, World War II, was also the result of a leader framing his country’s situation in terms of losses. People usually see Hitler and the Allied appeasement of him as an example of a situation where the achievement of one’s desired gains encourages them to push for more and to take risks in order to do so. In reality, though, Hitler saw Germany as being in the domain of losses. In fact, Hitler rose to power because most of the country saw Germany in the same way. Toward the end of World War I, Major-General Ludendorff, one of Germany's leading military officers, said: “If Germany makes peace without profit, then Germany has lost the war.” Germany made peace at great cost to itself, both territorially and economically. Prospect theory shows Hitler trying to recoup these and previous German losses throughout Appeasement.

Prospect Theory and Organization Design & Development

For Organization Design and Development practitioners, prospect theory and these examples of nations going to war call into question our understanding of organizational decision making. Taking a lesson from neorealism in international relations, organizations are actors looking to meet their own needs in a roiling economic landscape. From big corporations to small nonprofits, competition for resources is fierce. And it is quite easy for a leader and their organization to have a reference point of loss and therefore gamble more than they may need to.

When working with leaders, it is our duty to provide alternative reference points. As strategists with plenty of case examples, we can help leaders make new meaning of their perceived positions. We can serve as coaches, helping leadership make new meaning of their realities. And we can also put the organization in conversation with itself by bringing multiple viewpoints from a cross-section of the organization to support leaders in weighing decisions.

We worked with one CEO who started our strategy and organization design project willing to make huge gambles to regain market position he felt he had lost. After multiple meetings with his design team -- a cross-section of the organization -- he saw the potential to head in a new direction, one with bigger payoffs. It avoided the loss-aversion tactic of unnecessary expenditures to double down on a dangerous position. He moved from an increasingly crowded market to a brand new one through the invention of a distinct service offering, putting him in the realm of gains, not losses.

Conclusion

Decision making is heavily influenced by our reference points. Where we see ourselves in relation to others determines how we act. Our reference points are choices, however. And as consultants and coaches, we are in the position to help our clients choose reference points that will serve them most.