"Why would it be in Israel's interest to not have peace, if peace were achievable?"
This is so easy that it doesn't merit a game-theoretic approach : because
war and hot peace have yielded rewards that are much beter than what regular peace promises. End of story.
Now, for the underlying assumptions of that logic. First off, we are talking about the Israeli leadership throughout that country's existence (a few excpetions, such as the quickly exonerated Sharett only prove the rule). And not about the Israeli people. The latter have been conditioned to lean towards militarism and brutality in dealing with Palestinians only because of the relative impunity of such behavior. So, it is Israeli leadership, with a reluctant but unable to form an alternative Israeli people behind it, that has forged the steadfast official policy of continuous hot peace interrupted by episodes of violently aggressive wars.
Second, the rewards we are talking about are, once again, defined in the terms of Israeli leaders, who have been acting according to Reformist Zionist ideology. An ideology that explicitly (see Ze'ev Jabotinsky's
Writings, inter alia) calls for a confrontational and beligerent Israel, always in attacking mode against the neighbors and in alliance with the World Superpower
du jour. Attacking until the Arabs cry 'uncle' and not just sue for peace but completely capitulate.
So, the rewards, in Zionist eyes, are snatching more land from the Holy Land that is "occupied by infidels". The Israeli man in the street could perhaps prefer a modicum of peaceful living instead of more land, more land and even
more land (Netanyahu recently hinted at Israel's historical claims that supposedly reach well into Jordan) but when you get that land relatively cheaply (i.e. no punishment) you start to like it. And you start voting for it.
Third, Israelis are no different, whether they are Jews or not, than any other human being, Dr Goebbels to the contrary. As much as it is an obvious obsolete notion to consider
any people as Supreme or Chosen, it is also naive to assume that a people will choose to sacrifice something for relatively nothing. The something is the people's stated national objectives; the nothing is what the U.N. demands, i.e. peace.
For an introduction to Israel's steadfastly beligerent strategy in dealing with the Arabs and the Palestinians, as revealed from recently released Israeli documents, I recommend humbly, if repeatedly, Avi Shlaim's ground-breaking
"Iron Wall".