Game theory can be a great way to look at negotiating strategy.
Even when we do not have full information on the individual decision process and perceived payoffs of the participants, we can attempt to reverse engineer what they might be and then think about likely outcomes.
First important point is to recognise about the Brexit negotiation is that it is a negative-sum game. Brexit has large economic costs so thinking about how they are allocated will be contentious. Negotiations on dividing profits are generally less problematic than allocating losses due to the endowment effect. It will be hard for either side to go back to the electorates with any form of loss, so a complete failure of the negotiations is definitely more likely than markets are currently pricing.
Second, there is no clarity or agreement on how large these costs are. It is entirely possible that the Brexiteers genuinely believe that there are net gains to the UK from leaving the EU. Disagreement on the payoff between outcomes can lead to mutual incomprehension and poor decisions. It has been argued that WW1 could have been avoided if the participants had had more time to work out how destructive it would be. However, the Schlieffen Plan put Europe on a rapid and rigid path to war.
If the tight timetable of Brexit does not give the participants enough time to understand how bad some outcomes are, they may not avoid them. I think that markets are not correctly pricing how destructive these bad outcomes are.
What is UK negotiating position?
The UK approach so far has been to take what they would describe as a “firm” negotiating stance. The EU might describe it as unreasonable. This could be because the plan is
- Start at an extreme and expect to compromise towards the middle
- Believe your starting point is reasonable and the EU will be forced to agree to it
- The outcome of no deal is a good one and only an extremely favourable deal with the EU is preferable.
My fear is that the UK government is at 2.) or 3.) and not 1.) as it is consistent with their rhetoric. Another reason to believe that 1.) is not their view is that they are actively whipping up anti-EU feelings, representing their negotiating stance as a moral one against an immoral enemy.
Even if the plan is to start extreme with both sides moving to a compromise, it is unclear they are going about it the right way. The theory behind this approach is laid out in “Influence” by Robert Cialdini. Humans have a desire for reciprocity, if you start out by asking for more than you want and then make concessions, the other side will find themselves compelled to concede as well.
This is such an effective method that it becomes the norm in a variety of bargaining situations: whether you are buying a house in London, a teapot in Morocco or getting a Bill through Parliament.
There is one instance where it is counter-productive. “If the first set of demands is so extreme as to be seen as unreasonable, the tactic backfires” as we are “not seen to be negotiating in good faith”. As described in the last post, the EU does not see the UK’s approach as reasonable and so will be unlikely to move to a position closer to the UK’s desires.
If we look at 2.), I think that no-deal is preferable to the EU than the deal the UK is offering. Allowing the UK to leave and retain all the benefits of membership would fatally undermine the very existence of the EU and the Single Market. A no-deal result is a poor economic outcome but a lower magnitude than for the UK so I do not see outcome 2.) as viable.
Option 3.) is a bad strategy to me given that I think no-deal is a disaster for the UK. But that is a large topic and needs to be explained properly in later posts.
Comparison to Greece
The dangerous precedent I see for this negotiation is what happened with Greece in 2015. Syriza and Varoufakis acted as though compromising with the EU was a bad idea so that if they were completely intransigent, the EU would back down. When the EU did not back down, they refused the deal and called a referendum. The Greek government won this on July 5th , in which they gain support to not accept the EU bail-out terms. Then on 13th July, Greece accepted a deal with worse terms all round. Somehow, they represented this as a victory in which they had stood up to and beaten the EU.
We have clear precedent on how the EU will behave in tough negotiations. The danger is that the UK misunderstands both the game they are playing and the nature of their opponent.