Utility of Prospect Theory for Assessing China’s Grand Strategy under Xi Jinping

Abstract: Xi Jinping, now nearing the end of his third term as President of China, has had immense influence on China’s contemporary grand strategy. While the field of International Relations already has various tools to assess grand strategy, Prospect Theory, an economic game theory, now offers substantial potential. Developed by Daniel Kahneman and Amos Tversky in 1979, this theory suggests that actors are sensitive to gains and losses from a reference point, causing changes in perceptions and frames within which risk-taking decisions are made. Three specific time-windows in Xi Jinping’s tenure have been examined using the tenets of prospect theory. While the theory has some limitations, the essay determines that prospect theory indeed offers valuable tools towards assessing China’s grand strategy under Xi Jinping.

Introduction

Xi Jinping was unanimously appointed as President of China and General Secretary of the Chinese Communist Party (CCP) for an unprecedented third term on 10 Mar 2023 in Beijing’s 1 th Great Hall of the People.¹ He had come into power during the 18 Party Congress in November 2012, which marked a new chapter in the post-Mao era.²  The last decade (2012-2025) under Xi Jinping has seen China commencing its ‘rise’, albeit marked by setbacks and unforeseen ‘black swan’ events. The Middle Kingdom has now entered a crucial phase during which it wishes to transition from the world’s second-ranking power to the apex position. Based on China’s strategic decisions during the past decade of Xi Jinping’s rule and his policy choices, this essay will examine the utility of prospect theory towards assessing China’s grand strategy under Xi Jinping.³ While the entire range of Xi Jinping’s grand strategic choices and decisions are beyond the scope of this essay, three specific time-windows will be examined. The first is the Senkaku/Diaoyu Islands crisis of 2012-2013; the second is the ‘oil rig’ crisis and the ‘P-8’ incident in the South China Sea (SCS) in 2014; and the third is a poly-crisis, which commenced in 2019 and continues to this day. In all three cases, Xi Jinping’s strategic choices will be viewed through the prospect theory, critically examining the theory’s utility in examining China’s grand strategy, and its inherent limitations.

Through the lens of prospect theory, the essay argues that China is more likely to accommodate and avoid risks by de-escalating when operating in a domain of gains i.e. when they feel sufficiently strengthened in their ability to control events. Alternatively, when operating in a frame of losses, China is likely to take steps to escalate. A caveat here is an assumption that Xi Jinping plays the decisive role in choices that define China’s grand strategy. However, various countervailing forces such as domestic factors, bureaucratic hurdles, nationalism etc. may also play a role in choices. Nevertheless, for a specific assessment of China, which has a highly organised hierarchical system, we assume that Xi Jinping’s worldview would have a significant impact on China’s choices.⁴

China’s Grand Strategy

As China navigates its way through the global political system, international relations (IR) theorists have used various models to understand China’s grand strategy. While there are arguments against the concept of what constitutes a grand strategy, there is adequate empirical data to suggest that countries employ formats similar to grand strategies, while not being formally aware of doing so.⁵  In the case of China, IR theorists have varying conceptions of grand strategy, ranging from century- long plans to pure opportunism.⁶ However, Andrew Erickson suggests that, to the extent that any global power today has a grand strategy, China certainly has one. The overarching theme of contemporary Chinese grand strategy is the distinct time horizon of 2049, the centenary of CCP’s founding. By this period, China aims to evolve into a modern socialist country, ‘re-ascended to the top of the world’, having transformed its military into world-class forces and achieved complete ‘reunification’.⁷

 China’s grand strategy is shaped by its strategic culture, which in turn has been nurtured by long-term geographic and political continuities. China has a long and vulnerable land border with 14 nations and poor maritime geography, and they have disagreements with their eight maritime neighbours, some of these clearly to improve their maritime situation. These considerations have resonance in the modern era and are a start-point for IR theorists to examine China’s strategic imperatives. These are survival of the CCP; modernisation of the military; governance of the Han homeland; stability in the minority regions; integrity of land borders; pursuing claims in the near seas; and emerging interests towards the East (BRI - Belt and Road Initiative).⁸

China’s ‘Great Leader’ Xi Jinping has consolidated power further than any of his modern predecessors, as indicated by his election for an unprecedented third term. This has presented an opportunity for Xi Jinping’s vision for China to be implemented over a longer time window than was previously available.⁹ The Russian aggression in Ukraine now presents both a threat and an opportunity to Xi Jinping, and this essay will extrapolate China’s future grand strategy utilising the prospect theory.¹⁰

Prospect Theory

One of the tools to examine risk-taking by China’s strategic leaders is the Nobel-prize winning ‘Prospect Theory’ proposed by Kahneman and Tversky in 1979.¹¹ This IR theory states that while actors expeditiously renormalise their reference frame after gains, they are much slower to do so in a domain of losses.¹² Expected-utility theory states that actors will behave rationally based on their estimation of the expected value of their options, by selecting the choice with the highest return.¹³ This theory, while  considering the inherent rationality of actors, does not account for changes in perceptions and frames in which the risk-taking decisions are taken. While the expected-utility theory forms the basis for realist and liberal IR theories, prospect theory adopts a more situational approach.¹⁴

Prospect theory addresses this weakness of expected-utility theory by proposing that actors are more sensitive to gains and losses from a reference point.¹⁵ Ergo, by posing risk-related dilemmas in different frames -- thereby establishing different reference points -- actors can take different decisions even in similar circumstances.¹⁶ Frames are shortcuts that actors use to 16 make sense of complex information, based on beliefs, values and experiences, which differ across cultures and nationalities.¹⁷ Since the vast majority of foreign policy decisions by political actors are inherently risky, it is apparent that risk, measured as a degree of outcome uncertainty, should be central to any IR examination.¹⁸ Actors are risk-averse when operating in a domain of gains and risk-seeking when operating in a domain of losses; this risk orientation is the reflection effect.

The concept of reference dependence is important since actors treat gains and losses differently, overvaluing losses relative to comparable gains, i.e. loss aversion. Loss aversion also explains a state’s tendency to invest in military interventions, even when facing increasingly difficult odds. Consequently, actors also tend to overvalue current possessions, namely the endowment effect.¹⁹ Together loss aversion and endowment effects lead to status quo bias - actors view the costs of moving away from the status quo as losses and the benefits of moving away from the status quo as gains; they tend to overweigh the former and therefore tend to prefer the status quo more frequently. Further, actors tend to overweigh outcomes that are considered certain, compared to outcomes that are just probable - the certainty effect. An example of the status quo bias is the attitude of Pakistan towards Kashmir - Pakistan overvalues their perceived loss of “Indianadministered Kashmir” (loss aversion), compared to their comparable gains (PoK and Gilgit-Baltistan), and even seeks military interventions against a superior adversary. Simultaneously, Pakistan also tends to covet their occupied territories and invest disproportionately in the defence of PoK and Gilgit-Baltistan (endowment effect). Taken together, once could surmise from prospect theory that Pakistan’s obsession with Kashmir is a case of status quo bias - Pakistan overweighs the costs of moving away from the status quo (which may include awarding some concessions to India) more than the benefits of moving away from the status quo (regional peace and settlement of the Kashmir issue).

Due to the asymmetry of gains and losses and the reference point’s role in defining the domain, reference point framing has a substantial effect on choice, and a change in the frame could lead to different preferences. Evidence indicates that actors accommodate to gains more rapidly than to losses, and in fact, do so immediately - the instant endowment effect.²⁰ There is also a tendency for actors to conflate the reference point and their aspiration, rather than frame themselves around the status quo, known as the reference point bias. The sunk cost effect relates to the commitment to a cause once investments have been made, and even when faced with losses, actors tend to invest more since they start operating in the domain of losses e.g. Pakistan’s obsession with Kashmir. Another characteristic is diminishing sensitivity - Actors are more sensitive to small changes near their reference point (status quo) than to larger changes that are farther away i.e. the impact of losses or gains diminishes as the magnitude of loss or gain increases. Further, actors tend to overemphasise low probabilities and underemphasise high probabilities. This is consistent with risk-seeking behaviour for low probability gains e.g. lottery tickets (lotteries with a larger prize seem more attractive, where the probability of winning is lower), and risk-aversion towards low probability losses e.g. insurance (actors overweigh low probability losses and are willing to pay a premium to avoid the potential pain of a large loss, even though the probability of that is low).

Having discussed the tenets of prospect theory, we will now examine the Senkaku/Diaoyu crisis of 2012, one of Xi Jinping’s first foreign policy challenges, which provides an insight into how shifting reference frames affect risky choices.

Senkaku/Diaoyu

The Senkaku/Diaoyu Islands have been disputed since they were annexed by Imperial Japan in 1895. In September 2012, the Japanese government nationalised three of the disputed Islands, setting off a crisis with China, and the possibility of a maritime conflict. Since the 1970s, SinoJapanese talks had tacitly agreed that this issue would be shelved until the next generation.²¹ Despite protests from its fishing community, the Chinese reference point had been one of tacit acceptance of Japanese sovereignty over the Islands. However, a trawler collision incident in 2010 escalated matters when the Japanese government attempted to initiate legal proceedings against the Chinese captain of the vessel. At this stage, China’s reference point started shifting from the status quo and matters came to a head when Japan nationalised three Islands in 2012. When Chinese officials’ appeals to the Japanese side to revert to the status quo were met with resistance, China shifted its reference point and demanded that Japan end its ‘occupation’ of the Islands.

With Xi Jinping assuming the presidency in late 2012, China had fallen into a reference point bias, wherein their reference point had shifted towards the new aspiration.²² China was also now operating in a frame of losses, due to the newly developed perceived loss of territorial sovereignty over the Islands, and policies were implemented to address the newly adjusted framing. Reflection effect drove the increasingly risk-seeking Chinese to establish coast guard patrols in waters surrounding the Islands in 2012-2013. By January 2013, China had established a near-permanent presence in the waters surrounding the Islands and adjusted to the new status quo. By late 2013, with China now operating in a domain of gains that tends towards risk-averse behaviour, Xi Jinping signalled de-escalation of the dispute in a public pronouncement. The Senkaku/Diaoyu dispute highlights linkages between reference points and risk propensity and their importance in strategic decision-making by Xi Jinping. In the next section, we examine the utility of prospect theory towards understanding Xi Jinping’s actions during two back-to-back crises in the South China Sea (SCS) in 2014.

South China Sea

In 2014, Xi Jinping encountered two successive crises, the ‘oil rig’ crisis with Vietnam and ‘P-8’ incident with the US. The oil rig crisis was initiated when China’s state-owned petrochemical company China National Offshore Oil Corporation (CNOOC) moved a floating oil platform near the Paracel Islands in the SCS. Vietnam viewed this as an attempt to alter the status quo and reinforce China’s disputed 9-dash line, leading to violent anti-China protests in Vietnam and maritime confrontations between the Chinese and Vietnamese navies. In response, after diplomatic parleys, CNOOC withdrew the oil rig from the vicinity of the Paracel Islands and the oil rig crisis abated swiftly.²³

 In the second case, a US military P-8 maritime reconnaissance aircraft operating over the SCS near China’s Hainan Island was intercepted by a Chinese fighter jet. This incident occurred in August 2014 immediately after the oil rig crisis, and the US military claimed that the fighter jet had passed within fifty feet of the P-8 aircraft, endangering the safety of the aircraft and its crew. The Chinese response to the incident was sedate. It was apparent that Xi Jinping had decided to de-escalate the situation, even though the P-8 aircraft had been intercepted over waters claimed by China. Moreover, after the incident, China commenced negotiations with the US to formulate ‘rules of the road’ to manage contested airspaces.

A possible rational choice explanation of Xi Jinping’s decision to de-escalate in both these incidents is that his hold over the party and nation was weak (he was only two years into his first presidency). Further, there are suggestions that both crises were triggered without the knowledge of the CCP leadership, especially Xi Jinping, who therefore did not wish to claim ownership of these incidents. However, the Chinese decisions to deescalate do not conform to the standard calculus associated with Chinese strategic culture. Even if both incidents were conceptualised and executed at lower levels, the response to both crises would have come directly from Xi Jinping.

Interestingly, an analysis of Xi Jinping’s choices shows that they conform to the tenets of prospect theory. Prospect theory indicates that Xi Jinping would choose a risk-averse option and accommodate only if he was in a domain of gains (reflection effect). A closer examination of Xi Jinping’s position within the CCP and China at that time indicates that he was indeed in a dominant position. After assuming office in 2012, an anti-corruption purge had removed all potential domestic challenges - after meeting Xi Jinping at the Asia-Pacific Economic Cooperation (APEC) meeting in late 2014, President Obama publicly remarked that Xi Jinping had consolidated power more comprehensively than anybody since Deng Xiaoping. Internationally, Xi Jinping was also on an ascendant, and during a CICA (Conference on Interaction and CBMs in Asia) meeting in May 2014, he had declared that Asians should solve Asian problems. Given his domestic and international standing at the time of the two incidents, Xi Jinping was operating in a domain of gains and his accommodative approach and tendency to de-escalate conform to prospect theory. China’s withdrawal of the oil rig and commencement of airspace de-confliction negotiations were therefore caused by Xi Jinping framing his reference point in a domain of gains and the reflection effect. However, by 2017, China’s economic growth had started slowing and a series of events occurred in quick succession, leading to a poly-crisis that continues to date.

Poly-crisis: 2019 to date

 Xi Jinping was elected for a second term in 2017 at the 19 Party th Congress, during which he strengthened his position within the CCP by enshrining ‘Xi Jinping Thought’ into the CCP Constitution. The dictum of “hiding strength and biding time” (taoguang yanghui) from the Deng Xiaoping period was replaced by a proactive maxim of “striving for achievement” (fenfa youwei). However, by this time Xi Jinping was facing considerable challenges on multiple fronts. China’s economic growth had slowed, and he was facing headwinds from Donald Trump. A border conflict with India and Bhutan on the Doklam plateau and an adverse International Tribunal for Law of the Sea (ITLOS) judgement in 2016 on the SCS had also created a rift between China and her neighbours. Furthermore, Xi Jinping’s signature BRI was increasingly being viewed as a neo-colonial venture, and China faced pushback on its large investments.²⁴ The Hong Kong protests in July 2019 posed an existential challenge for Xi Jinping and the CCP, who had to use considerable force to quell the protestors.²⁵ In late 2019, China also faced global opprobrium over its role in the COVID-19 pandemic, with the 2023 US annual threat assessment stating, “Beijing continues to hinder global investigation, resist sharing information, and blame other countries”.²⁶

A border clash with India in June 2020 visibly altered relations between the two largest countries in Asia, and a serious trust deficit emerged. As a hedging measure, India gravitated towards the QUAD and Indo-Pacific constructs.27 By the time US House Speaker Nancy Pelosi visited Taiwan in August 2022, Xi Jinping had been in a domain of losses for a considerable period and therefore retaliated with risky military manoeuvres in the Taiwan Strait. Xi Jinping and the CCP had also imposed a tough zeroCOVID policy and kept Chinese citizens under strict curbs until late 2022. Facing unprecedented internal protests over the policy, which citizens deemed unnecessary based on global relaxation of COVID-19 norms, Xi Jinping was forced to capitulate and lift the restrictions just before the 20th Party Congress in late 2022. Although elected for an unprecedented third term, Xi Jinping now faces challenges to China’s economy, demography, climate, and increasingly recalcitrant neighbours. Confronted with a US policy of economic and technology decoupling with China and the reelection of Donald Trump, Xi Jinping is likely to be operating in a deeper domain of losses, which could have implications for the international order.

However, a poly-crisis of this magnitude also highlights one of the limitations of the prospect theory: in effect its inability to coalesce a multitude of issues towards setting the reference point of an actor, in this case Xi Jinping. While a simplistic heuristic calculus would indicate that Xi Jinping has been operating in a domain of losses since 2019, prospect theory possibly fails to capture other influences, like bureaucracies, CPC factions, multi-sectoral issues, public sentiment etc that form part of the decisionmaking. This lacuna and other emergent limitations of prospect theory will now be examined.

Limitations of Prospect Theory

In the past three decades, prospect theory has emerged as a complementary tool to the rational choice model. Since prospect theory is heavily reliant on the reference point, determining its location in the heuristic domain remains a critical factor. The absence of a defined mechanism to empirically determine how an actor defines a reference point is the principal drawback of prospect theory. If we are unable to identify and fix a reference point independently of the actor’s behaviour, prospect theory remains a “theory of evaluation of prospects, not a theory of editing of choices - a reference-dependent theory without a theory of the reference point”.²⁸  Framing a reference point to assess Xi Jinping’s grand strategy policy choices is especially challenging since China’s actions normally result in outcomes in multiple dimensions.²⁹ However, one could argue that framing of issues, their background, second and third-order effects, values, self-interest etc., can be utilised towards establishing a reasonably precise reference point. This would lead to a better assessment of Xi Jinping’s grand strategic choices through the lens of prospect theory.

Further, prospect theory has its origins in economic game theory, where choices are discrete.³⁰ However, in the case of actors taking decisions that  would alter the grand strategy of a nation, especially China, there are rarely any binary options where choices result in a zero-sum game.³¹ Rather, decisions are made under duress of time and lack of information in addition to domestic issues, international pressure and one’s own prestige, among others. While we have assumed Xi Jinping to be at the apex of Chinese grand strategic decision-making, in reality the decision-making process is likely to be more sophisticated and nuanced. While prospect theory concerns itself with individual actors’ choices, it may not be adequate for an aggregated decision-making group with a wider diversity of biases and experiences, involving strategic interaction between actors at the state level.³² However, Taliaferro highlights that treating leaders’ speeches as agents of the states’ preferences and analysing them, will help overcome this problem.³³

It is also apparent that prospect theory does not have a discrete set of norms for its utility towards analysing IR. Primarily developed as a cognitive tool for economic game theory, prospect theory relies on heuristics around the reference point, risk orientation, loss aversion and framing. While profound insights are gained from the application of prospect theory, especially to civilisational cultures that do not conform to Western IR theories, prospect theory’s inability to function as an aggregating tool provides scope for its further refinement.³⁴ Further, various cultural and individualistic traits could affect risk propensity in strategic decision-making. For example, a study by Brumagim and Xianhua indicates that the Chinese are generally more risk-seeking than Westerners.³⁵ While this assertion would indicate that prospect theory (decisions under conditions of risk) would have greater applicability in the case of China, Huiyun Feng highlights that the Confucian view on Chinese strategic behaviour indicates that China, in general, shows a reluctance to use force.³⁶ Even when faced with direct security challenges, a negotiated settlement through diplomacy is preferred. Furthermore, if compelled to use force, the Chinese tend to pursue opportunities to revert to negotiations.³⁷ However, on balance, China’s strategic behaviour over the past few decades does indicate a level of conformity to the tenets of prospect theory.

Daniel Kahneman, who authored prospect theory in collaboration with Amos Tversky, also addresses blind spots of the prospect theory. As has been seen in the analysis of Xi Jinping’s behaviour, actors described by prospect theory are guided by the instantaneous emotive impact of gains and losses, and not by long-term prospects of treasure and universal utility.³⁸ Another cognitive aspect that is not addressed by prospect theory, which is fundamental to human beings as IR actors, is the emotions of disappointment and regret. While other IR theories also do not cater to these emotions and their accompanied biases, one could make the case that in prospect theory, decision-makers would anticipate these emotions when framing their reference points and making their choices. Having addressed the limitations of prospect theory for IR analysis, we will now examine its utility towards assessing China’s grand strategy.

Utility of Prospect Theory towards assessing China’s Grand Strategy

In this section, we will examine the utility of prospect theory towards assessing China’s grand strategy under Xi Jinping, based on deductions from the three specific cases discussed earlier. Xi, who has now emerged as an even more confident leader after the 20 National Congress, drove the th underlying policies in all three cases. Based on the inferences made in the previous sections, we can now examine the utility of prospect theory to extrapolate likely Chinese strategic behaviour under Xi Jinping.

Utilising prospect theory, we infer that Xi Jinping is increasingly likely to take greater risks to maintain China’s international status, reputation and own political legitimacy than to enhance those positions (status quo bias). Also, the ‘century of humiliation’ has been institutionally seared into China’s national consciousness.³⁹ Xi will therefore have a tendency not to accommodate historical territorial and reputational losses (Taiwan, SCS) and is likely to take excessive risks to recover them (reference point bias). Further, in case Xi Jinping is able to accrue territorial gains along any of China’s continental or maritime boundaries, there will be a tendency to immediately accommodate them (SCS Islands, Galwan etc) and take excessive risks to defend them (instant endowment effect). Prospect theory’s utility towards assessing Taiwan is also significant and indicates that sunk costs towards Taiwan in terms of diplomatic energy, goodwill, trade etc will influence Xi Jinping’s behaviour towards aggressiveness since accommodation towards losses is slow.⁴⁰

As China continues to increase its national power under the current leader, there is increasing likelihood of friction with the US. In terms of utility towards assessing China’s strategy towards the US, prospect theory has significant value. Prospect theory indicates that it will be preferable for China to deter the US from making gains, rather than to deter the US from recovering losses (loss aversion). Therefore, Xi Jinping may determine that it is better to deter the US from taking aggressive actions against China (economic, military or otherwise), rather than to compel the US to terminate an action or reverse any step that has already been taken.⁴¹ Due to loss aversion, it will also be more difficult for the declining hegemon (US) to accept the prospect of their nation’s waning prestige and influence. Further, due to the instant endowment effect, the US may not be able to adjust to the new reality of its reducing power differential with China. Instead, the US is likely to revert to outdated mechanisms and over-stretch itself, since readjustment is not politically and psychologically feasible. In these conditions, both nations are likely to fall into the Thucydides trap of the Peloponnesian wars.⁴² Prospect theory complements this ancient case-study and suggests that the US is likely to engage in increasingly risky policies, including preventive struggles in various spheres of competition. In contrast, China being the ascendant power and operating in an overall domain of net gain (economy, influence and military), is likely to be reluctant to take riskier options but would rather consolidate its gains.⁴³

 Another emergent utility of prospect theory is towards assessing China’s engagement within the international system. As seen in the cases of the SCS arbitration and the Senkaku/Diaoyu dispute, Xi Jinping has selectively used multi-lateral institutions for China’s benefit. Based on realism and constructivism, ‘institutional balancing theory’ suggests that under conditions of interdependence, states will cooperate in multi-lateral fora to enhance security, either in an inclusive or exclusive manner.⁴⁴ Inclusive institutional balancing involves drawing a state within an institution and using the norms to control the state’s behaviour. On the other hand, exclusive institutional balancing excludes a state from an institution and utilises its strength to control the target state’s behaviour. Prospect theory integrated with institutional balancing theory has specific utility for examining China’s behaviour. When faced with a choice in a multi-lateral environment, if China enjoys an advantage and is operating in a domain of gains, a risk-averse Xi Jinping is likely to adopt inclusive institutional balancing. However, when placed in a domain of losses that encourages risk-seeking behaviour, Xi Jinping is likely to choose an exclusive institutional balancing approach e.g. favouring the Shanghai Cooperation Organisation (SCO) over other western dominated fora.

These two divergent approaches by Xi align with prospect theory and indicate that China would selectively adapt its approach towards multilateral institutions, based on its reference point and framing of loss and gain. In the long-term, prospect theory could therefore have utility in examining China’s motivations and constraints towards climate change management. Prospect theory indicates that Xi Jinping is more likely to align with the US and the global community on climate change if the issue involves cooperation in not taking from the global commons, than if it involves contributing to the global good. This is because the former involves foregone gains while the latter involves actual losses, at least in the short term.

In determining the utility of prospect theory towards examining China’s grand strategy, it is apparent that some distinctive aspects have to be considered for its application. One of these aspects is the domain in which prospect theory is being applied e.g. state-level choices related to human lives, money, missing information etc. Another aspect is accountability, ergo an anticipation by decision-makers that their decisions would have to be justified to others. This condition has greater significance when prospect theory is applied within a democratic framework than within an autocratic one, where accountability is limited. An oft-neglected aspect that also affects variation in risk propensity is experience, which would strengthen strategic thinking and lead to lower bias.⁴⁵ On balance, the essay concurs with Daniel Kahneman - “IR scientists use theories as a bag of working tools, and prospect theory’s tools of reference point and loss aversion yielded new predictions compared to the rational-choice theory, which turned out to be true”.⁴⁶

Conclusion

The essay proposes further examination of China’s grand strategy under Xi Jinping and his successors using the prospect theory since it balances the neo-cultural aspect of China’s grand strategy with the post-colonial IR aspect of the ‘century of humiliation’. Prospect theory, therefore, informs that an ascendant China will be more accommodating. However, whenever China’s net power falls (as may be the case presently), Xi Jinping will revert to demands that have heretofore not been addressed.⁴⁷ In the US-China context, even a mutually hurting stalemate may create conditions for continuing conflict if one of the two sides ends up in a domain of losses from their reference point. If the US does not readjust its China strategy in response to power shifts and re-allocate tangible and intangible benefits accorded by the international rules-based order, it could lead Xi Jinping towards a domain of losses, i.e. seek more risky behaviour.⁴⁸

 A significant utility of prospect theory as an IR tool to assess and shape China’s grand strategy is its ability to account for China’s historical territorial losses. These are an important reference frame for China’s leaders, making them prone to risk-acceptant behaviour.⁴⁹ While an ascendant China will operate in an overall domain of gains, the will to recover historical losses and ascend to the apex of the global order indicates that China will not be compelled or deceived into accepting arrangements which do not address their core concerns.⁵⁰ Conflict also becomes an attractive strategy for an authoritarian leader like Xi Jinping, when the alternative is a serious deterioration in his position. This highlights the importance of paying more attention to the statements and signalling behaviour of Chinese leaders, especially when they are faced with critical foreign policy choices.

China’s grand strategy under Xi Jinping will therefore revolve around calculated risks to strengthen the CCP and boost China’s prestige. Xi Jinping’s willingness to take risks starkly contrasts with his predecessors’ proclivity to play safe.⁵¹ Further, his reference frame can be influenced by international as well as domestic factors, which play a substantial role in strengthening his hold on the CCP. Chinese strategic culture views weiji (crisis), as an amalgamation of wei (danger) and ji (opportunity).⁵² Xi Jinping is therefore likely to seek accommodation and de-escalate when his own domestic and international status is ascendant and he is operating in a domain of gains, while crisis escalation is more likely when he is in a domain of losses. Given that the ‘rise’ of China has already taken place, IR theorists and policymakers must utilise the prospect theory to adopt policies for the transference of Chinese leaders (Xi Jinping) into the desired reference frame. In conclusion, the essay posits that prospect theory has credible utility for analysing Eastern strategic cultures compared to other Western-oriented theories and offers alternative tools to examine China’s grand strategy.