Brexit: History, Market Failure & Science Threat

The late-breaking news on Thursday night that the United Kingdom voted to exit the European Union left global markets rattled and many scratching their heads. As John Goodman points out in his history of referenda for Atlas Obscura the UK overwhelmingly voted to stay in the European Community (the EU’s predecessor) in 1975. Obviously, much has changed since.

To me, the two most interesting aspects of the “Brexit” vote are the failure of prediction markets and the impact the move may have on science and technology in Europe. I don’t have much analysis of my own to share here, so in lieu of that I’ll share some links to some of the more interesting articles I’ve read as I’ve tried to wrap my head around the vote.

Failure of Prediction Markets

• If you don’t know what a prediction market is or if you want to learn more, you might want to check out this list of resources from ConsensusPoint, a Nashville-based research group that specializes in prediction markets.
• The Economist explains that prediction markets are subject to a number of cognitive biases that create a gap between expectation and reality. Their take: this gap can be exploited by the likes of pro-Brexit folks and such black swan political candidates as Donald Trump.
• David M. Rothschild, an economist with Microsoft Research and proprietor of PredictWise, published an article analyzing the statistical upset of the Brexit vote. According to him, prediction markets failed due to market forces… most traders discounted the possibility of Brexit and held positions that would lose their entire value if (and when) the measure passed. In other words, it’s the same story as other market failures: over-confidence in one outcome and lots of unhedged risk led to a bad outcome.

Threats To European Science and Tech Research & Investment

• Published before the vote, the MIT Technology Review explored the impact of a (then hypothetical) Brexit vote on British science research. Highlights from the article include: 83% of British scientists opposed Brexit; Britain is an outsized benefactor of EU funds for scientific research, receiving more money than it contributes to the fund (meaning Brexit has negative ROI for UK science); UK scientists may lose out on collaboration opportunities, much like Swiss scientists did when Switzerland tightened its borders in 2004.
• Although the European Investment Fund has not announced any plans to change its relationship with the UK post-Brexit vote, there’s now a risk that the EIF will hold off on investing in new venture capital funds located in the UK, according to an article in FT Alphaville.

Remember, the Brexit vote is just the first step in what might be a long and messy divorce from the EU. In this particular case, researchers, technologists, entrepreneurs and investors might be caught in the crossfire. But a broader takeaway is the fallibility of prediction markets and polling data, which we should all keep in mind leading into the US election cycle.