Geopolitical risks reveal behavioral economics at work. Prospect Theory explains why warring states make seemingly irrational decisions. The US entered the Iran conflict expecting high-probability military gains after weakening Iranian defenses, preferring certainty over further gambles. Iran, facing economic collapse with inflation exceeding forty percent and regional proxy networks dismantled, responded by closing the Strait of Hormuz and launching hundreds of missiles despite certain losses. Kahneman and Tversky's framework predicts this behavior: when outcomes appear certain, actors become risk-averse, but when facing probable losses, they seek risk through desperate action. Understanding these psychological patterns helps explain why cornered states escalate rather than surrender, revealing predictable human behavior that shapes global markets and geopolitical stability.
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