Mental Effort and Rational Voters

Why do people believe in protectionism?

For the most part markets are fairly rational: millions of investors making hundreds of decisions each day do a pretty good job pricing the stocks, bonds, and commodities that they trade. It’s not a perfect system, but for the most part it works.

But when it comes to economics millions of people seem to believe that if we raise trade barriers and tax foreigners it will help our country save jobs, despite both theory and evidence to the contrary—that in fact protectionism penalizes efficient companies and rewards inefficient ones. Also, increasing trade improves the economy for all parties. When consumers have more money left over from buying cheaper imported clothes, they spend it on things like cell phones and music downloads.

One explanation has to do with the way we think. It takes mental energy to do the algebra necessary to figure out why protectionism is self-defeating. And people can only handle so many difficult tasks at once. Studies have shown that when people exercise, they have a hard time sticking to a diet—not necessarily because they’re hungry, but because they’re tired. Similarly, when faced with a difficult mental task, individuals have a hard time exerting themselves physically.

So if folks naturally tend to look for scapegoats for economic problems—foreigners, bureaucracy, greedy “fat-cats”—and going against these stereotypes takes intellectual effort, then in challenging times we will tend to see an upsurge in protectionism and punitive legislation.

The good news is that in the long run people tend to act rationally. The bad news is, with an election coming up, times are still hard. Let’s hope that as the economy improves people will vote rationally this year.

Douglas R. Tengdin, CFA
Chief Investment Officer
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By | 2014-09-09T17:04:17+00:00 January 9th, 2012|Global Market Update|0 Comments

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