Decoding Brexit through game-theoretic approach

World
Europe

Editor's note: Richard Fairchild is an associate professor at the Finance of School of Management at the University of Bath. The article reflects the author's opinions, and not necessarily those of CGTN.

With the parliamentary Brexit vote looming on January 15, all possibilities remain on the table.

Will MPs accept British Prime Minister Teresa May's deal? Will it be rejected? If it is rejected, where will we go from there?

A new deal which must then be renegotiated, and must be acceptable to both the EU and the British people? Crashing out with "no deal"? Norway or Canada option?

An anti-Brexit demonstrator holds the EU flag and the Union Jack flag during the protest in London, January 8, 2019. /VCG Photo

Alternatively, the opposition Labour Party leader, Jeremy Corbyn has demanded a snap general election if May is defeated in the coming Brexit vote.

Interestingly, Corbyn has suggested that, if Labour Party were to win such an election, then they would not seek the "no-deal" option, but would attempt to push back the Brexit deadline, and seek to renegotiate the deal on more favorable terms for the British people: an election victory for Labour would "break the deadlock, and give the Party an opportunity to negotiate the Brexit deal in its own terms."

The complexities and varying strategies around the Brexit deal have been analyzed using a game-theoretic approach, which considers the economic and behavioral/psychological factors affecting the Brexit negotiations.

The analysis considers how the British prime minister has been going to the negotiating table in Brussels, bargaining with the EU as a representative of the British people.

The focus of the research is on the potential conflicts between the objectives of the prime minister, and those of the British people.

Demonstrators wearing yellow vests protest the Brexit deal due to be voted on in the UK Parliament on Tuesday in Westminster, London, January 12, 2019. /VCG Photo

May's main aim is to maximize the probability of a deal: thus, she has felt the need to compromise between the demands of the EU and the British people, in an attempt to gain acceptance from both sides. She has achieved the first part: agreement at the EU. Next week, she is attempting to secure agreement from the British Parliament.

In the game theoretic analysis, the author considers the various strategies facing the British public, following agreement by the EU.

The game focuses on three possible strategies: agree to the deal put forward by May; reject the deal, and replace the current prime minister with a negotiator more sympathetic to British objectives (potentially Labour's arguments for a general election, with Labour winning and negotiating a Brexit deal for the British people?), or to walk away with a no-deal.

Behaviorally, the analysis recognizes two psychological factors in the whole process:

a) the opposition to May could be overconfident in their belief that they can do a better job of negotiations with EU than May could, and b) May has faced a real economic and psychological tension in trying to maximize the probability of a deal, which has necessarily led to compromises towards a soft Brexit.

British Prime Minister Theresa May holds a press conference after the second day of the EU leaders summit at the European Council in Brussels, October 18, 2018. /VCG Photo

Too tough, and the EU would not accept it, but too soft and the British people will not accept it.

The deal that May brought back from Brussels appears not to be acceptable in London. Some argue that they could have secured a better deal: in terms of the game-theoretic analysis, they may have been overconfident in this belief: they would probably have had to compromise in the same way that May had to.

In all of this, the various players consider, in the terminology of bargaining theory, their outside options (their payoffs if they walk away with "no deal').

Some argue that they would prefer to walk away with a "no-deal" outcome. However, Business Secretary Greg Clarke has said that they must reach a compromise, and take the "no-deal" option off of the table, amid "mounting alarm" from international companies around the possibility of a "no-deal" Brexit.

The compromise may not be only between Britain and Europe, but may also be between May and UK opposition. Indeed, "the Government has signaled that it will accept a Labour backbench amendment to secure workers' rights after Brexit."

It is clear to see that "real-world negotiations (such as Brexit) may involve much complexity and uncertainty with many different demands and objectives. Determining an effective and acceptable deal in such circumstances may be very difficult."

With the Brexit deadline rapidly approaching, it will be interesting to watch future developments in this complex game.

(If you want to contribute and have specific expertise, please contact us at opinions@cgtn.com.)