Beware the self-referential elite…

As we have mentioned before, the so-called “experts” got the outcome of the Brexit referendum badly wrong, as did the financial and prediction markets.

Now, of course, the post mortems are (quite rightly) continuing about how that could have happened; and what the implications may be for scenario and risk analysis and selection in the future. The model-builders are, no doubt, feverishly tweaking their assumptions and inputs; as the risk managers wonder what may happen next.

One topic which they may wish to think about is that considering one’s self an “expert” carries, in itself the risk of facile misjudgment! Of course, the work of Philip Tetlock, inter alios, on the ability to assess and forecast outcomes is well known by now. His work tends to focus on how there are certain traits that those with a demonstrably superior forecasting skill tend to possess- individuals whom he dubs “superforecasters”. Nevertheless, even those with such superior skills are still only able to produce incrementally better assessments of probabilities; and much depends on the careful definition and framing of the question being posed.

However, what happened in the case of the Brexit referendum may raise an additional nuance, which (as with so many matters) should have been obvious with the benefit of hindsight: ironically, almost all of those “professionals” or “experts” involved in forecasting or predicting probabilities and outcomes tend to share certain characteristics which, in this case, almost certainly constrained their ability to conceive of the likelihood of the outcome which occurred, namely a “no” vote.

In essence, they found it hard to identify with an outcome that appeared irrational and potentially harmful to the economic wellbeing of those who voted ‘no”, as evidenced by the consequences to date in terms of the fall in the value of Sterling and the political and economic turmoil that continues; and were seduced by the fact that the outcome of the previous Scottish referendum had been a vote that appeared to reinforce the importance of economic self-interest as votes were cast. So, of course, in the case of “Brexit”, the same outcome (for the status quo ante) was “inevitable”- except it wasn’t! One could argue that the individuals and organizations involved were victims of their own “framing” issues, because they found it difficult to conceive of the fact that such a large component of the English (and the Welsh) voting population was so disenchanted with the elite and the perceived problems of “immigration” that it was willing to register what amounted to a protest vote.

At Awbury, we had already made the point in a previous post that the risk of a “no” vote was more than a remote tail risk, and had, therefore, factored it into our scenario analysis and risk management. The outcome was yet another example of the truism that “tails” are often “fatter” than a predictive model anticipates.

And just to cheer you up, Dear Reader, we shall leave you with a quotation from Kierkegaard’s diary (from 1846): “…because the minority is generally formed by those who really have an opinion, while the strength of a majority is illusory, formed by the gangs who have no opinion.” We are not sure that the Brexit “Leavers” would be happy with being characterized as “gangs”, but post-Brexit, their lack of any coherent planning for the consequences of their vote certainly brings to mind an illusion of strength.

The democratic process and the behaviours of voters are full of paradoxes.

The Awbury Team

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