Voting and Rationality

In much of the US today is Election day, so I will devote some time to politics and how it can be used to demonstrate finance (and economic) topics.

In the first of two blog entries dealing with politics, we will begin off with a seemingly simple question: Why vote?

It is a question that has pained economists for years. Why? The odds are very very high that you will not be the marginal voter (i.e. the election results would thus be the same whether or not you voted) and yet the cost of voting falls on the shoulders of the voter (no benefit, high cost).

So why vote? Writing in the NY Times, Stephen Dubner and Steven Levitt (who show good spelling diversification of their first names) examine the question and come to the conclusion that people vote so that they can be seen voting. I would take it a step further and suggest that this is only a portion of it. They also vote so they can feel good about what they did (or else why would so many absentee ballots be cast?), so while they may not feel AS good if no one sees them, they still feel better (to think of it in the form of a regression, it has a positive coefficient).

A couple of “look-ins” from their article:

“Why would an economist be embarrassed to be seen at the voting booth? Because voting exacts a cost - in time, effort, lost productivity - with no discernible payoff except perhaps some vague sense of having done your "civic duty." As the economist Patricia Funk wrote in a recent paper, "A rational individual should abstain from voting."”

They then examine a study of voting habits in Switzerland when voting by mail became allowed:

“Every eligible Swiss citizen began to automatically receive a ballot in the mail, which could then be completed and returned by mail…..Never again would any Swiss voter have to tromp to the polls during a rainstorm; the cost of casting a ballot had been lowered significantly. An economic model would therefore predict voter turnout to increase substantially….In fact, voter turnout often decreased….”

Why?

“It may be that the most valuable payoff of voting is simply being seen at the polling place by your friends or co-workers.”

Which is interesting in and of itself, but I think may have finance implications as well. Voting is a good example of how what we (if I can allow myself to be called an financial economist for a moment) often deem irrational behavior. But when viewed from a total utility point of view (“I feel better when I vote, so I vote”), It may be perfectly rational to vote.

This is not unlike my views of some behavioral finance hypotheses. From a strict risk and return perspective, investor behavior does often appear irrational, but investors, like voters, may gain some psychic satisfaction from their behavior. Thus from a perspective of utility maximization, the investor may still be acting perfectly rationally. Unfortuntely, this is MUCH more difficult to measure than risk and return.