Brexit, Psychology, and What Next to Do
Hersh Shefrin, Mario L. Belotti Professor of Finance, wrote a piece published by the Huffington Post Blog about the issues surrounding the United Kingdom's exit from the European Union and presented his thoughts about what comes next.
Find an excerpt from the piece below:
No matter our reactions to the outcome of the Brexit referendum, whether distressed or elated, we need to understand the psychological backdrop underlying the sentiment for Brexit.
In my view, a vote for Brexit was largely a cri de coeur from those perceiving themselves to be psychologically in the domain of losses. The most important research finding about people who perceive themselves to be in the domain of losses is that they are prone to take unwise risks, hoping at least to break even. And in the minds of many, Brexit is an unwise risk.
At the risk of oversimplification, those voting for leaving the European Union can be characterized as being of an older generation, having lower incomes, or both.
Few people find it easy to accept being below average. For those who set their reference points at the average, having below average incomes will make them feel financially in the domain of losses.
Culturally, today’s Britain is very different from what Britain was like before 1970, and especially what it was like before World War II when the British Empire was in existence. For those who nostalgically remember that Britain, today’s Britain will make them feel culturally in the domain of losses.
Hersh Shefrin is the Mario L. Belotti Professor of Finance at the Leavey School of Business at Santa Clara University. He is a pioneer of behavioral finance and regularly teaches on the topic to both graduate and undergraduate students. He is widely published in the area and often speaks on the subject both in the U.S. and abroad. He is the author of a number of books, most recently Behavioral Risk Management (December 2015). He completed his Ph.D. in the economics of uncertainty at the London School of Economics, his Master of Mathematics at the University of Waterloo, and a B.S. in economics and mathematics from the University of Manitoba.