Does prospect theory help explain support for Brexit in the UK and for Donald Trump in the US?
The bit of the theory I have in mind is the prediction that people are risk-seeking when they are losing, because they gamble to get even. This explains several phenomena: why the favourite-longshot bias is stronger (pdf) in the last race of the day*; why (pdf) stock-pickers hold onto losing shares; why losing sports teams abandon their tactics in favour of risky all-out attack and “Hail Mary” passes; and why we sometimes get rogue traders – men who try to recoup losses by making riskier trades and so lose even more.
The same thing might explain support for Brexit and Trump. It’s generally agreed that both causes draw support from workers and the unemployed who feel that they’ve lost out under the existing order. As Jonathan Freedland says, “the voters rallying to populist insurgents are those who feel failed by conventional politics, left behind either economically or culturally.”
Of course, voting for Brexit, Trump or other populists is risky. But prospect theory tells us that those who feel they’ve lost might want to take risks. This might be because they feel they’ve nothing to lose: the threat of higher unemployment isn’t so scary if you’re already unemployed or if you think there’s a high chance of losing your job anyway. And/or it might be because they think that change carries upside risk.
This mechanism is amplified by another – distrust. The elite’s warnings that Brexit and Trump are risky are true. But many poorer workers and unemployed don’t trust elites – a fact which Brexiteers are cynically exploiting.
My point here is the opposite of Janan Ganesh’s. He writes that Brexiteers are rich enough to be able to ignore the economics of Brexit. Whilst this is true of Boris Johnson and Nigella’s dad, it cannot explain Brexit's support among over 40% of voters.
You might object there that, in theory, there is another mechanism tying impoverishment to political attitudes – resignation. Often, the poor can be apathetic about politics. I’m not sure there’s a contradiction here. The poor can be both apathetic in the sense of not actively seeking positive political solutions to their plight, but also willing to take a risky option should it present itself.
I’m making two points here.
First, we don’t need to invoke xenophobia, small-mindedness or racism to explain the popularity of Brexit or Trump. Such support can also arise from decent people acting as behavioural economics predicts.
Secondly, what we’re seeing here is a cost of inequality. Unemployment, insecurity and low pay has generated constituencies willing to back risky options. And, as Eric Uslaner and Henrik Jordahl has shown, inequality breeds distrust so that even on those (rare?) occasions when elites are correct, many voters don’t believe them. Perhaps, therefore, support for Trump and Brexit are not so much diseases as symptoms of a wider malady.
* Some researchers, however, find (pdf) this isn’t statistically significant, at least in the US.