{"id":9379,"date":"2018-06-25T11:51:32","date_gmt":"2018-06-25T10:51:32","guid":{"rendered":"https:\/\/ounews.co\/?p=9379"},"modified":"2018-06-25T11:51:32","modified_gmt":"2018-06-25T10:51:32","slug":"a-hard-brexit-is-looking-increasingly-likely-according-to-behavioural-economics","status":"publish","type":"post","link":"https:\/\/www.open.ac.uk\/blogs\/news\/arts-social-sciences\/society-politics\/a-hard-brexit-is-looking-increasingly-likely-according-to-behavioural-economics\/","title":{"rendered":"A hard Brexit is looking increasingly likely \u2013\u00a0according to behavioural economics"},"content":{"rendered":"

Gloomy forecasts for the post-Brexit economy, and a psychological tendency to gamble rather than accept certain losses, may boost public support for a giant leap away from the EU \u2013 despite the fact that most experts are advising a cautious small step.<\/p>\n

Parliamentary rebels have tempered their demands for a vote on the final Brexit deal<\/a> and abandoned an earlier House of Lords attempt<\/a> to keep the UK in the European Economic Area. Attempts to maintain membership of the customs union<\/a> and single market<\/a> by Brexit\u2019s opponents have seemingly failed.<\/p>\n

But in keeping up pressure to stay as close as possible to the EU, they risk driving Britain further away from it. Anti-Brexiteers now risk colliding with one of the harshest lessons of behavioural economics \u2013 once people are determined to leave, any scare about the next step may just prompt them to run further away.<\/p>\n

Most independent studies<\/a> point to bigger economic losses the more the UK distances itself from present EU trade arrangements. So does the Treasury\u2019s own<\/a> analysis, unless the UK gains a remarkably generous bespoke deal.<\/p>\n

But the same studies also suggest there will be losses even from the smallest step away. And the error around these calculations gets bigger as they move further from present arrangements, so that the gloomier forecasts are also hazier. This allows Leave campaigners to agree with \u201cRemoaners\u201d that an ultra-soft Brexit is worse than remaining \u2013 and to draw the opposite conclusion: that only the most radical departure will do.<\/p>\n

Double or nothing<\/h2>\n

People are generally risk-averse when it comes to potential gains. They tend to opt for guaranteed receipt of a certain amount (say, \u00a350), rather than the chance to gamble for a larger amount (say, a 50% chance of getting \u00a3100) while getting nothing at all if they lose the bet. The expected outcome (to someone who\u2019s risk-neutral) is \u00a350 in both cases. But, as the proverb goes, a bird in the hand is worth two in the bush.<\/p>\n

By contrast, most people are risk-preferring when it comes to potential losses. Instead of definitely losing \u00a350 they would prefer to gamble on a 50% chance of losing \u00a3100 and a 50% chance of not losing anything. Although the mathematically expected loss is \u00a350 in each case, most of us will run the risk of worsening that loss if that brings a comparable chance of escaping it altogether.<\/p>\n

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<\/figcaption>The evidence that people routinely gamble to avoid guaranteed losses, while playing safe with guaranteed gains, was assembled by cognitive psychologists and turned into an elegant \u201cProspect Theory<\/a>\u201d by Amos Tversky and Daniel Kahneman \u2013 who won the economics Nobel for it in 2002<\/a>.<\/figure>\n

An important consequence of this asymmetry is that people may react differently to a choice that is functionally the same, if it is re-framed in terms of losses rather than gains<\/a>. You might, for example, prefer the surefire gain of \u00a350 if you perceive the alternative (gaining \u00a3100 or \u00a30, with equal probabilities) as a lottery.<\/p>\n

But if you are loss-averse, you might also part with \u00a350 \u2013 calling it an insurance premium \u2013 to avoid risking an equally probable loss of \u00a3100 or \u00a30. So, stating post-Brexit outcomes in terms of GDP loss, compared to the status quo, may have worked out to the Brexiteers\u2019 advantage.<\/p>\n

The Remainers\u2019 dilemma<\/h2>\n

Faced with a certain loss from the \u201csoft\u201d option, those (the majority) who voted for Brexit will inevitably be drawn towards the \u201chard\u201d alternative. It might be a huge gamble, but it seems worth taking if it brings some chance of ultimate gain, against the certain loss from a soft Brexit.<\/p>\n

While the hard Brexit risk may be very high \u2013 with potentially even bigger economic losses, according to leaked government analysis<\/a> \u2013 a bigger break creates room for radically different and rosier scenarios. It\u2019s always possible that, after a transitory tussles with Brussels, a clean break from EU rules sparks a British social and economic renaissance.<\/p>\n

\n

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Losing hope? Garon S\/flickr, CC BY-NC-ND<\/p><\/div>

This could come from fully embracing <\/span>globalisation and free markets<\/a> (the preference of those on the Right), or from a return to social, industrial and economic policies <\/span>lost to past liberalisation<\/a> (preferred by those on the Left). These are opposing and incompatible approaches, but they coalesced to swing the referendum in 2016.<\/span><\/figcaption><\/figure>\n

For those with no wish to stay, a giant leap with the distant possibility of landing on higher ground will tend to seem much more appealing than a small step that\u2019s bound to lead downhill. And developments since the referendum may be reinforcing a pattern of preferences<\/a> by which voters who never wanted to Leave now embrace the \u201chardest\u201d way of doing so, once they\u2019ve definitely lost the option to Remain.<\/p>\n

Behavioural trouble<\/h2>\n

This isn\u2019t the first time that Prospect Theory has loomed behind Brexit-related decisions. The original Leave vote in 2016 can be explained as a battle of gain\/loss framing<\/a>, which the Brexiteers won by exploiting discontent with people\u2019s present situations.<\/p>\n

Remainers unsuccessfully tried in 2016 to persuade voters that EU membership brought a net gain \u2013 through trade, unrestricted travel and work opportunities. They wanted the UK to stick with these sure gains, rather than gamble on a step into the unknown outside the EU which might result in great loss.<\/p>\n

The Leave campaign successfully re-framed EU membership as a sure loss \u2013 of money (since the UK is a net contributor), sovereignty (since the EU sets rules) and external links (since the common external tariff blocks the UK from doing its own trade deals). Convinced that they were losing under the current arrangement, many voters saw leaving as a way to avoid this sure loss, even if not entirely believing Brexiteer predictions of instant gains once outside.<\/p>\n

So having persuaded a majority of referendum voters that they could only avoid a certain loss by leaving, hard Brexiteers will now exploit the same behavioural trait to propel the UK as far away from the EU as it can go. The risk for Remainers is that by framing the soft Brexit option as damage limitation, they may simply propel people towards the hard alternative \u2013 as the only way their decision to Brexit can possibly do them any good.<\/p>\n

Alan Shipman<\/a>, Lecturer in Economics, The Open University<\/a><\/em><\/p>\n

This article was originally published on The Conversation<\/a>. Read the original article<\/a>.<\/p>\n","protected":false},"excerpt":{"rendered":"

Gloomy forecasts for the post-Brexit economy, and a psychological tendency to gamble rather than accept certain losses, may boost public support for a giant leap away from the EU \u2013 despite the fact that most experts are advising a cautious small step. Parliamentary rebels have tempered their demands for a vote on the final Brexit […]<\/p>\n","protected":false},"author":19,"featured_media":9382,"comment_status":"closed","ping_status":"closed","sticky":false,"template":"","format":"standard","meta":{"footnotes":""},"categories":[15],"tags":[89,305,754,891,1923],"class_list":["post-9379","post","type-post","status-publish","format-standard","has-post-thumbnail","hentry","category-society-politics","tag-alan-shipman","tag-brexit","tag-economics","tag-finance","tag-risk"],"_links":{"self":[{"href":"https:\/\/www.open.ac.uk\/blogs\/news\/wp-json\/wp\/v2\/posts\/9379","targetHints":{"allow":["GET"]}}],"collection":[{"href":"https:\/\/www.open.ac.uk\/blogs\/news\/wp-json\/wp\/v2\/posts"}],"about":[{"href":"https:\/\/www.open.ac.uk\/blogs\/news\/wp-json\/wp\/v2\/types\/post"}],"author":[{"embeddable":true,"href":"https:\/\/www.open.ac.uk\/blogs\/news\/wp-json\/wp\/v2\/users\/19"}],"replies":[{"embeddable":true,"href":"https:\/\/www.open.ac.uk\/blogs\/news\/wp-json\/wp\/v2\/comments?post=9379"}],"version-history":[{"count":0,"href":"https:\/\/www.open.ac.uk\/blogs\/news\/wp-json\/wp\/v2\/posts\/9379\/revisions"}],"wp:featuredmedia":[{"embeddable":true,"href":"https:\/\/www.open.ac.uk\/blogs\/news\/wp-json\/wp\/v2\/media\/9382"}],"wp:attachment":[{"href":"https:\/\/www.open.ac.uk\/blogs\/news\/wp-json\/wp\/v2\/media?parent=9379"}],"wp:term":[{"taxonomy":"category","embeddable":true,"href":"https:\/\/www.open.ac.uk\/blogs\/news\/wp-json\/wp\/v2\/categories?post=9379"},{"taxonomy":"post_tag","embeddable":true,"href":"https:\/\/www.open.ac.uk\/blogs\/news\/wp-json\/wp\/v2\/tags?post=9379"}],"curies":[{"name":"wp","href":"https:\/\/api.w.org\/{rel}","templated":true}]}}