Still confused about why Brexit happened? It was the psychology, stupid!
I’ve been at the South by South West conference in Austin, Texas where the buzz has been about AI, Machine Learning and Virtual Reality. But there’s been an important sub-theme — behavioural economics — that has popped up in all the conference strands, from combating fake news through marketing music to understanding the new mood of populism.
Michael Bodansky of London PR Agency Freuds gave a particularly insightful presentation on the factors that drove the vote for Brexit. This is a rough summary of his presentation, which attracted a big crowd, not least due to the parallels between what happened with Brexit and the US Presidential election.
Behavioural economics developed in response to the unrealistic assumptions of conventional economics that individuals behave rationally at all times. Daniel Kahneman is the founder of the discipline and won the Nobel Prize for Economics in 2002 for pointing out we’re all subject to rather a large number of irrational biases that compromise the findings of conventional economic models.
Bodansky makes it clear that he does not know whether the Leave team was aware of the power of these psychological factors during their campaign, only that they appear to have used them and that they worked.
7 principles of behavioural economics that explain #brexit
1. System 1 versus System 2
Kahneman’s best-seller Thinking, Fast and Slow popularised the idea that humans have two brain systems. The first, an instinctive, reflexive mode that evolved to make split-second, life-saving decisions (System 1). The second, a rational slower-moving mode (System 2).
Much of behavioural economics revolves around the interplay (or lack of it) between these two systems.
Knowingly or unknowingly, the Leave campaign emphasised System 1. The slogan ‘taking Back Control’ was a classic System 1 tactic: simple and emotionally appealing. Meanwhile, George Osborne of Remain offered a detailed analysis showing the average British family would be 4,300 pounds worse off. That’s a lot more complicated. It involves calculations like, what’s my family income, and what’s the timespan we’re talking about here? Important but hard, and a classic System 2 approach.
Even the colours of the two campaigns may have played a part. Remain chose blue, Leave chose red — a classic System 1 colour used widely to mean stop in traffic signalling.
2. Loss aversion
One finding of behavioural economics is that we hate loss far more than we love gain — studies suggest the ratio is two to one.
The campaigns both used loss aversion. Remain used the Osborne analysis of income loss mentioned above. Leave took a more emotional approach portraying the decision as a once-in-a-lifetime opportunity not to be missed.
That particularly appealed to older voters for whom being in the EU was a relatively recent phenomenon, and whose memory of the ‘good times’ perhaps pre-dated Britain’s entry.
3. Game theory
During the Brexit campaign, one of the most discussed comments was that from Michael Gove when he told a television interviewer “We’ve had enough of experts”. Was this just a glib, throwaway remark? Or did it touch on a fundamental point of friction running through society?
The relevance of this to Brexit needs some explanation. But first a bit of game theory. In an economic experiment known as ‘the ultimate game’ Player A is given a sum of money and Player B is given nothing. The only rule of the game is that neither player gets anything unless the two can agree on a division of the cash.
Equity would demand a 50:50 split. But the game typically starts with low offers from Player A being rejected as unfair by Player B. Rational economics would suggest that anything would be better than nothing and that Player B should accept such low offers. But fairness is a powerful emotion and eventually deals tends to be struck in the range of 70:30 to 60:40.
The crucial insight from this game is that players will say no to a deal that will make themselves better off but is regarded as unfair.
The relevance of this in the Brexit context, says Bodansky, is that the offer from Remain was perceived as a deal with the elite. The Remain campaign notably mobilised powerful individuals and organisations — the International Monetary Fund, the World Bank, President Obama among them.
However, Bordansky suggests that since the Credit Crunch of 2007/8 and the subsequent recession, faith in politicians and economists has been lost. The elite had failed to deal with a systemic challenge and when it came to adjusting to it, the burden appeared to fall on ordinary people.
Under such circumstances, many thought the offer from Remain so weak they were prepared to reject it just to spite the elite even though it was likely to harm their own interests.
Fairness perhaps deserves its own category — how unequal can a society become before inequality surfaces as a driver of political change? It’s a learned instinct. Ethologist Frans de Waal has found from experiments with capuchins that they reject unequal pay (see the section of the video from 12:46 to see how capuchins respond to conditions of inequality).
5. Status quo bias
Change threatens loss, continuity offers security. The net result is to create a bias in human nature towards leaving things as they are. It’s the same reason most of us don’t change the factory settings on our smartphones.
Initially, both the campaign teams thought this factor stacked the odds in favour of Remain. But Bordansky offers a more nuanced analysis: different people have different status quos. In the case of Brexit, the older you were then the less likely you would regard being a member of the EU as the norm. Additionally, you might regard the ‘good times’ as belonging to an age when Britain was part of no European political grouping.
That certainly shows up in the analysis of voting by age with the older the voter, the more likely they were to vote for Leave.
Anchoring refers to the tendency to use the first piece of information received as the anchor for all subsequent information. In the Brexit campaign the anchor was the figure of 350 million pounds per week cited as the cost of EU membership. It was memorably painted on the side of Leave’s red battle bus. Widely ridiculed by experts it nevertheless became the focus of many discussions of the economics of Brexit.
7. Hindsight bias
And now that it is all over, many of us have fallen victim to hindsight bias — the tendency to view the course of events as inevitable, as in ‘20:20 hindsight’. Brexit is widely thought of as a natural expression of concerns over immigration. It’s also thought that this was always a knife-edge vote. But at the time, both Remain and Leave camps thought there’d be a clear vote for the status quo, as had been the case in the Scottish referendum on Independence the previous year. Hence the widespread shock over Brexit.