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On Brexit and the randomness of life, heavy rains and the butterfly effect

Ariane Chapelle, published in Risk Universe. July 2016. Issue number 55. 

On the morning of June 24, the UK and a good part of the Western world woke up in shock at the news that, after 43 years of membership, a short majority of 72% of the British and Commonwealth population of the UK – the ones allowed to vote – decided to throw in the towel and leave the EU community: a result perceived as good for some, terrible for many and surprising for most; a result that neither the opinion polls, nor the bookies, nor the political class, nor the layman, had called.

   Brexit is a striking example of anti-self- ful lling prophecies that can take place in politics; unlike very common self-ful lling prophecies in economics. In economics, where market behaviours and dynamics are based on trust and beliefs, prophecies tend to be self-ful lling; we make our beliefs happen through the mere fact we believe they will realise: we buy stocks, believing that markets will go up and, because we buy stocks, markets go up. We believe that the economy will pick up, so we start consuming again and, by the fact we consume again, the economy goes up. Sensitivity of economics to beliefs and sentiment is so strong that piloting anticipations and beliefs is one of the major roles of central banks.

In voting, the inverse of this phenomenon can take place: if too many voters are so con dent in the result of the poll that they don’t bother voting, it is the challenging opinion, by mobilising more voting force, that in the end reaches an unexpected majority. For this referendum, like in many other polls, challenger or extreme opinions are over-represented in the votes, as they typically attract a larger turnout of voters.

Added to this, the torrential rain pouring over London on June 23, causing trains and metro breakdowns, just on the after-work peak hour, is believed to have significantly impacted the turn-out of people intending to vote; mostly a white-collar, London-based, diploma-holding class, typically Remain voters. In London, the turnout was 69%, against 72% nationwide.

It is ironic to think that British heavy rains on June 23 pushed the UK outside of the EU. With the tragic assassination of MP Jo Cox, misleading opinion polls and bookies bets, June 23 has been the perfect example of a perfect storm.

What are the lessons for risk management?

In the face of asymmetrical anticipation, rms prepared very differently. The range of preparations I observed went from the lightest to the fullest. The lightest – in continental Europe – was an imprecise note prepared by the risk department and not shared with the rest of the executive committee. The fullest, observed at a UK trading company, was a several months- long, meticulous and comprehensive preparation programme, encompassing every possibility. Firms best prepared had contingencies for every possibility and teams of tens of traders, risk managers and IT support on site for a full night’s shift on June 23 to 24. The best-prepared rm I know did well through the night and well in the days to come, resisted the shock and carried on.

  For all of us now anyway, uncertainty reigns and no one could pretend to know what the future holds. In the face of increased risk and economic uncertainties, resiliency and the use of self-fullling prophecies are my main wishes post-Brexit. Resiliency rst: external events, exposure and threats, whether political, regulatory, cyber or terrorists, are becoming more intense and more unpredictable. Prevention is useful, but not enough; incident management and impact mitigation by increasing the resiliency of organisations and their capacity to absorb and manage shock, is increasingly important. Much effort has been dedicated in the financial services to assess risk and prevent incidents. I believe that these assessment and preventive controls are now reaching a limit and more effort should be deployed in improving organisations’ response to changes of their internal or external environment.

The self-ful lling prophecy phenomenon in economics is a wilful way to get out of the doom and gloom that Brexit could trigger. If enough people believe that a situation  is positive, it will be. Despite the shock, despite the disappointment and the randomness of the situation, it is our responsibility now to move on and adjust. “Intelligence is adaptation”, as Darwin said. If Britain behaves like Brexit is a good thing, for commerce, for the competivety of the pound, for the lower tax rates and special trade agreements with large nations – whether the US, Canada or Europe – then the country can manage to prove wrong the Economist, which said it nds “much to lament” in the Brexit vote, but “would not be happier than to be proved wrong”. By behaving as if the Economist will be proved wrong, maybe the UK will shape its reality according to its prophecy.