In the last few weeks, we’ve seen increased talk of a hard Brexit, fostered by comments from British Prime Minister Theresa May. Here are three quick observations from a game theoretical perspective.

First, we are in the very early stages of the pre-negotiation—we’re not even in the negotiation. The negotiation will start only when the United Kingdom triggers Article 50, which is expected to happen in March 2017. The U.K. High Court also just ruled that the government cannot trigger Article 50 on its own, but rather requires parliamentary approval. While Brexit is still likely, the timeline for triggering Article 50 could be in question.

So, we are in the phase where the players are trying to send signals to each other in order to improve their would-be negotiating position. As investors, we should not interpret these signals as necessarily being each player’s actual position.

Second, we should not expect the negotiation to go smoothly.

Players are trying to send signals to each other in order to improve their would-be negotiating position. As investors, we should not interpret these pre-negotiation signals as necessarily being each player’s actual position.

Imagine the difference between negotiating a prenuptial agreement and a divorce settlement. If you push too hard when negotiating a prenup, the consequences could be bad for the marriage. Therefore, the incentive of both players is not to push hard and risk tolerance is limited. But that’s completely different in a divorce settlement.

With Brexit, we are closer to a divorce settlement than to a prenuptial agreement and, therefore, we should expect a bit of tension in those negotiations. But it’s not a complete divorce settlement as the U.K. will still need to trade with the rest of the eurozone.

Finally, this negotiation is going to take a long time. There is a two-year window from the time when the negotiation is triggered and during the negotiation period there is no incentive to make early concessions. Therefore, we expect players to try to run against the end of the negotiation window in order to extract the best possible deal for themselves.

So, while Brexit outcomes will take a long time to unfold, we need to take our time to assess the incentives of the different players in the furors of the negotiation game theater.

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Please carefully consider the Funds’ investment objective, risks, charges, and expenses before investing. This and other information is contained in the Funds’ prospectus, which you may obtain by calling +1 800 742 7272. Read it carefully before you invest or send money. Investing includes the risk of loss.

Any statements or opinions expressed are those of the author as of the date of publication, are subject to change without notice as economic and markets conditions dictate, and may not reflect the opinions of other investment teams within William Blair Investment Management, LLC or the Investment Management Division of William Blair & Company, L.L.C.

This content is for informational and educational purposes only and not intended as investment advice or a recommendation to buy or sell any security. Investment advice and recommendations can be provided only after careful consideration of an investor’s objectives, guidelines, and restrictions.

Factual information has been taken from sources we believe to be reliable, but its accuracy, completeness or interpretation cannot be guaranteed. Investments are subject to market risk. Forecasts, estimates, and certain information contained herein are based upon proprietary research and should not be interpreted as investment advice, as an offer or solicitation, nor as the purchase or sale of any financial instrument. Statements concerning financial market trends are based on current market conditions, which will fluctuate.

William Blair does not provide legal or tax advice. Please consult your tax and/or legal counsel for specific tax questions and concerns.

Distributed by William Blair & Company, L.L.C., member FINRA/SIPC.

Copyright © 2017 William Blair & Company, L.L.C. "William Blair” is a registered trademark of William Blair & Company, L.L.C. No part of this material may be reproduced in any form, or referred to in any other publication, without express written consent.

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