There is no question that Brexit is a monumental case of either risk management or the lack of it. What, then, can my academic discipline offer to those embroiled in this frustrating combination of labyrinth and quicksand? asks Anette Mikes, professor at HEC - Université de Lausanne


In their 2018 polemic, Saving Britain, senior Labour politician Andrew Adonis and the political scientist Will Hutton pondered Britain’s tortuous path out of the European Union: “Is Britain really going to make itself meaner, smaller and poorer?” The risks of the Brexit deadline are looming, while commentators argue that there is no countervailing Brexit dividend. Companies—British and otherwise—are delaying investment in the UK or redirecting it to less uncertain economies. Thousands of jobs are moving abroad or are disappearing due to close-downs, as at Bombardier and Nissan. The Bank of England anticipates tens of thousands of lost jobs in the financial services industry.

Some, who consider the European Union the source of all the UK’s ills, see Brexit as an opportunity to regain lost national sovereignty; in particular, control over immigration and trade policies. To them, trying to minimise the UK’s separation from Europe—or, worse, reversing the 2016 Referendum—would be a betrayal of democracy.

Conspicuous in this argument by their absence—as the economist Paul Collier observed—are the voices of pragmatic non-ideologues.

My field is risk management, a supposedly pragmatic discipline unmoved by ideology. That is, ideology will determine what risks one is willing to take, but should not determine one’s assessment of possible risks. There is no question that Brexit is a monumental case of either risk management or the lack of it. What, then, can my academic discipline offer to those embroiled in this frustrating combination of labyrinth and quicksand?


Risk Management Lesson Number 1:

When historic precedent is missing, forecasting is suspect.

There have been many contrasting forecasts of what Brexit would do to or for the UK economy. The contrasts were probably at their most extreme leading up to the Referendum. A forecast is supposed to be an attempt to detect in past events a trajectory than can be plausibly extended into the future. Yet when it comes to Brexit, there is no past trajectory to trace. As Ivan Rogers, the former British ambassador to the EU, points out in his 9 Lessons in Brexit, no developed country has ever left a trade bloc, let alone in a disorderly fashion. Many “no dealers” advocate that leaving the EU “on WTO terms” will cause no disruption, as the WTO rules would provide a safety net. However, as Rogers points out, the “so-called ‘WTO rules’” deliver no clear guidance in some key sectors of the economy, so again, there is little basis there for forecasting. Instead of engaging in wishful thinking, we ought to expect that a disruptive act that no one has ever tried might well cause disruption that is most hard to plan for. That is not, in itself, a decisive argument for or against. It is a warning, however, that our knowledge of the future is very limited indeed. There is an alternative approach to forecasting under conditions of extreme uncertainty: scenario planning. Imagining “alternative futures” - best-case, worst-case scenarios – requires us to think about the various “landing places” we could end up at. As events unfold, we may learn that one scenario is more likely to manifest than others, and as its contours emerge, we may take proactive steps to mitigate its impact or take advantage of it.

Risk Management Lesson Number 2:

Uncertainty does not mean you might get lucky. Sometimes there is no upside.


In business, uncertainty is what gives you a chance to win. The only reason an investor has a chance to make a lot of money is that no one knows for sure what stocks will be winners. But sometimes the uncertainty doesn’t include winning at all, just how much one is going to lose. On 26 February, 2019, the UK government published its preparedness report on a “no-deal” Brexit, including an impact assessment. A no-deal scenario is currently expected to leave the UK economy 6.3% to 9% smaller after 15 years (compared to what it would have been under the business-as-usual scenario). The worst-hit areas would be Wales (-8.1%), Scotland (-8%), Northern Ireland (-9.1%) and the northeast of England (-10.5%). The prosperous metropolitan south is notable by its absence from that list. This scenario analysis confirms one of the paradoxes of the Brexit predicament: the very people who voted for it in the greatest numbers (the northeast) would suffer the worst effects. The geographical divide that already plagues the UK is likely to widen further, which could seriously undermine the stability of British society. Is any Brexit outcome—even the most hopeful—worth this risk? This is a moment to exercise what we in risk management call the Precautionary Principle: If a possible outcome would cause more harm than we are willing to tolerate—that is, if there is a risk beyond our collective risk appetite—we should not proceed. At the very minimum, we need to take a rain check and come up with alternatives (see Lesson #4).

Risk Management Lesson Number 3:

Beware the natural human bias to discount the worst-case scenario.

Given the possibility of an intolerable outcome, we have to take into account the faults in our own decision-making. Psychologists have long been demonstrating that human beings have a built-in “optimism bias”. In an uncertain situation, we find it is easier (and more natural) to assume that the worst can’t really happen and that, if necessary, we can ride out whatever does happen. This bias is even more powerful if we have commitments to or investments in our present course of action. In this way, we end up incubating and nurturing a risk we otherwise might have avoided or mitigated. Indeed, we see now that many of the man-made disasters we can all remember—from Enron and subprime mortgages to Challenger and Deepwater Horizon—could well have been avoided, had it not been for the overconfidence and tunnel vision of key decision-makers. When it comes to Brexit, experts claim that the UK (and for that matter, many of its partners in the European Union) are woefully unprepared for a no-deal scenario. Decision-makers are still in the “recovery window”, yet they are collectively unwilling to say, “No! Back up! We can’t let this happen.” In fact, negotiators seem to prefer a strategy of “playing chicken” as they narrow down the list of available options to Mrs. May’s deal (which most UK parliamentarians find unacceptable) or no deal at all (the disruptive worst-case scenario).


Risk Management Lesson Number 4:

Generate more options than you think you have.


Stephen Johnson, author of Farsighted, makes the case against such single-mindedness and “going with your gut” when it comes to consequential, life-altering—in this case, history-changing—decisions. He argues that one crucial tactic is to deliberately brainstorm and generate more options than one currently seems to have. Current discussion of a short Brexit delay won’t do that. A delay would buy some time, but—due to the definite deadline that would still be involved—would not substantially change the UK’s options or its bargaining power.


Paul Collier’s recent article in the Spectator suggests something that might increase the UK’s options: revoking Article 50. Collier cites Winston Churchill’s observation in The Darkest Hour that “you don’t reason with a tiger while your head is in its mouth”. Getting us out of the corner that the Brexit deadline has painted the UK into could allow time for other things to change in Britain’s favour. For example, as Collier argues, upcoming European elections could change the positions of key players. The UK, still a member, might become able to modify the EU into an enterprise more compatible with what its citizens want or else to negotiate a well-planned and non-disastrous exit.


Sure enough, such a radical extension of the UK’s available options would be a huge political risk for a government whose definition of representative democracy does not allow for the scenario that over time, the electorate might change its mind. British voters, formerly keen on Brexit, might have found out crucial information that was not available to them at the time of the Referendum about the possible consequences for employment, trade and border controls. In any case, a risk-management approach would take into account that key stakeholders (in this case the electorate) might be changing their minds in the face of the emerging realities and risks of the situation. An honest national conversation of the expected risks and benefits (in light of the learnings of the last three years) and a new social contract would be needed urgently to see how far the collective risk appetite of the British public stretches.


Risk Management Lesson Number 5:

Recognize the values that are at risk and make the necessary trade-offs with eyes open.


Every consequential decision has a moral component. By now, academics and most commentators agree that the Brexit vote was a “protest vote”, a “mutiny” by those who feel they are “left behind” and, worse, “abandoned” by a more fortunate half of the population. Several academics (among them the economists Paul Collier and Colin Mayer) make the argument that the current form of capitalism in Britain is socially toxic, so much so that its survival is in question. In The Future of Capitalism, Collier argues that because capitalism still offers our only hope of sustainable prosperity, we need to reform it—so as to restore its widespread popular legitimacy—rather than abandoning it. That would require practicing it in a way that is not predatory to social capital; for example, sacrificing national pride and culture for the sake of economically beneficial movement of people across borders or sacrificing local economies and ways of life for the sake of “creative destruction”. Rather, it must take a form that is compassionate and fair. Collier further makes the point that “regardless of whether we end up leaving [the EU] or remaining”, we need to address the root causes of the Brexit mutiny by restructuring our benefits system, investing massively in training, and beginning the task of rejuvenating our provincial economies. It will be hard enough, and an economically damaging Brexit would make it harder—maybe even impossible. (Not just for lack of money but for lack of social cohesion.)


When Theresa May became prime minister, her government promised to “honour the 2016 Referendum and deliver Brexit”, while at the same time appealing to a number of social values—notably, compassion and fairness—in order to create a “society that works for all”. This would presumably address the social crisis of rising poverty, homelessness, and the widespread degradation of trust and other forms of social capital. Keep in mind that, for more than a decade, UN reports have been warning that child poverty in Britain is among the worst in the developed world and that the poorest families are getting poorer, while the UK government itself acknowledges that Brexit in any form will “make Britain worse off”.


This begs us to rethink the moral dimension of Brexit. In the field of risk management, we speak of “values at risk”. For businesses, this means that when they make choices, they risk not only their profits but also certain values, such as treating employees well or treating customers honestly. There is no inherent hierarchy of values; rather, a company has to decide on its own priorities and then take those into account when making decisions in which different values conflict—a very common occurrence. What is the core value at risk in Brexit?

For Brexiters, one value is their own voice in a democracy. They consider any “softening” of Britain’s stance in negotiations—any alignment with the EU—a threat to this value. But perhaps the most important value for them is freedom from EU control, particularly over immigration policies. This is a value for which even some amount of economic prosperity is worth sacrificing.


But in our globalized world, “getting back control” is illusory. No country—even the very strong (say, the US) or the very isolated (say, North Korea)—has total control over its circumstances. What is primarily at risk here, then, is the fairness of UK society (and perhaps the survival of the UK as a single country). But this, in turn, depends on the prosperity of the UK. Thus, if we re-center the discussion on this value at risk, the primary threat will appear to become, not EU regulations, but a bad Brexit deal or a shambolic crash-out from the EU. Even the EU’s most onerous or absurd regulations don’t prevent the UK from achieving a fairer and more compassionate society. (They might complicate it, but they wouldn’t preclude it.) A serious shrinkage of the UK economy could inhibit it though.


In sum, a risk management approach to the Brexit conundrum would be to see it in the light of its root cause—the crisis of capitalism in the UK. In this light, the primary value at risk is much-needed economic reform to create a fairer and more compassionate practice of capitalism. Brexit then seems an intolerable—the more so because unnecessary—risk to the very value that motivated those who voted for it in the first place. In her first prime ministerial address, Theresa May appealed to that value, but under intense political pressure, she changed her focus to something best described as Brexit for Brexit’s sake—the fulfilment of a contract rather than of a truly worthy ambition. Perhaps it is not too late to return to that ambition—to be pragmatic in the service of an ideal. As Bernard Shaw said, “Those who cannot change their mind cannot change anything”.