Brexit – An ‘Ambiguity Aversion’ Perspective.

One of the most remarkable aspects of the Brexit referendum result, which has not received much coverage in the post-Brexit analysis, is just how much of a challenge it was to get a ‘leave’ result, far more perhaps than people realise. – The the official result was 52/48, but actually the real feelings of the British public towards the EU may have been far more negative. – The reason I make this assertion, is that people have a strong and unconscious bias to preferring the status quo over change. 
Let me explain:

Every year, I give a lecture on Behavioural Finance at the LSE, on behalf of the Society of Technical Analysis. I approach this from an applied view, focusing on how various behavioural biases impact human decision-making and affect people’s risk decisions in their trading and investment activities. – Most people are familiar with the bias of ‘Loss Aversion’, which describes how our decisions are heavily skewed by our fear of negative outcomes, which rather perversely often leads to people increasing the odds they suffer a ‘negative outcome’. There are however many other unconscious biases which skew our thinking and decision-making. One of the most pervasive in the world of trading and investment is ‘Ambiguity Aversion’, otherwise expressed as fear of the unknown, or fear of uncertainty.

To highlight how 'Ambiguity Aversion' manifests itself, I use use as an example a particular conundrum known as the Ellsberg Paradox. In the Ellsberg paradox, people are asked to choose a particular colour ball from one of two pots. - The pots are covered so you cannot see inside them. But you know that one pot contains 50 red marbles and 50 black marbles, and the other pot contains 100 marbles, but which the ratio of red to black marbles is unknown. If you pick a Black marble in one pick, you will win $100

In tests done with people facing this problem, typically people overwhelmingly prefer to choose from the pot with the known quantity of 50 red and 50 black marbles. This is despite the fact that the odds of picking a black marble from either pot is actually identical. In the unknown pot, the marbles could be all red, but equally could be all black, and any number of possibilities up to 50/50. Add all these equal possibilities, and the outcome is 50/50 in aggregate.

If people were perfectly rational, they would not have a preference for either pot, so about half would pick the first pot and the other half would pick the second. – Ironically even after this was pointed out to the test subjects, they still had a preference for the pot with the known ratio. - This test, and various version have been carried out and the results consistently show that people exhibit strong aversion to ambiguity and uncertainty, meaning they have an inherent preference for the known over the unknown. In other words, they have a strong bias to favouring the status quo when faced with a choice.

How do I bring this back to the Brexit vote?

In terms of the vote, no one actually knows how much the preference for avoidance of uncertainty affected the outcome. But the remain side were largely playing on people’s fear of uncertainty. David Cameron was known to be a big fan of Behavioural Economics and Nudge principles. The remain camp's campaign became known as ‘Campaign fear’ in the popular media, and this played to this innate fear of uncertainty and how if people chose remain over leave, the outcome would be extremely negative. They also played on people’s loss aversion. - One could argue that not only did the remain camp pander to this fear, they also had all the heavy armour and ammunition in terms of of experts, political heavyweights, business heavyweights, far greater funding and resources. - If one considers our innate fear of uncertainty, and how many people were probably heavily biased towards the remain camp as a vote to stay with the status quo, and the greater resources at the disposal of the remain side, the result itself was actually all the more remarkable. – I know a lot of people who only marginally voted to remain, of which I admit I am one. The status quo was a big factor in my deliberations, prefering it rather than the stepping into the unknown. - 52/48 was the official outcome, but if we adjusted it for the Status Quo bias effect, actually it is possible there may have been a much larger underlying rejection of the EU. – In the wake of the vote, some people were saying that given the stakes at play, the vote should have been drawn up along lines that a 55% majority needed to leave. Actually, it is quite possible that a truer statement may have been that 45% majority should have been needed to change the status quo.

In terms of the many views of the experts, and in no way intended to denigrate them, but they are just as prone to 'ambiguity aversion'. If anything, their superior belief in their forecasts, and the confirmation bias this entails, could actually skew their objectivity on views of a post-Brexit world. I recall the discussions around Britain's decision not to be part of the Euro during the 1990s. Back then many experts were predicting how negative this would be for the UK. Actually it has been quite the opposite, and the much maligned Gordon Brown is often forgotten in the part he played in ensuring Britain never joined the Euro.

My own final thought. The EU itself could do itself a huge favour by considering this vote as far more significant. Britain may actually be a bellwether for a much wider distrust of the EU in its current form. Rather than just accepting Britain’s departure, it may want to change itself in a way which accommodates Britain and other national interests, and keeps the overall broad concept of the EU, albeit in a more acceptable form, to the wider European public.

Brexit Image Copyright: zentilia / 123RF Stock Photo

Steven Goldstein is a leading Performance and Executive Coach working with Traders, Banks, Energy Firms and Hedge funds: He is Managing Director of at Alpha R Cubed, which works with banks and investment firms to improve their human capital within financial risk businesses. To know more about Alpha R Cubed, visit their website or email Steven at

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