In finance, there’s something called the “Efficient-Market Hypothesis” which states that a given asset (i.e. a stock) that’s currently being traded reflects all information in regards to determining the value of it.  Thus it is impossible, or at the very least very hard, for any asset to be trading severely over or under-value for an extended period of time.  Intuitively this makes sense if you consider the entire market as a series of different forces that act on an asset, with the final asset price as an equilibrium of all these forces.  However, the consequence of this is profound and controversial.  It implies that it’s never “worth it” to put any effort into investing or trading.  If this were the case then, the entirety of the finance industry would not function, which would bad since I’m in it.  To “get around this”, a prevailing view among many professionals is that in most cases the market is “pretty efficient”.  However, within this relative efficiency is pockets of inefficiency that can still be exploited to make money.  A consequence of this is that most finance professionals spend considerable effort in exploiting the inefficiency in very targeted areas of expertise, while assuming that the rest of the market is efficient even if they don’t actually believe it.

A similar parallel can be drawn with the political system as well.  We can view the different viewpoints and opinions that people have on a given policy or candidate as a market.  People who agree will bid the policy up and people who don’t will sell it down.  At the end of the day, assuming that everyone participates, the resultant policy or candidate will be an aggregate of the will of the people.  

As a citizen of the free-world (probably) should be very joyful of this as that means that the will of the people is being obeyed.  However, I will argue that you and most people in this arrangement will often be less than satisfied. 

We can consider the distribution of political viewpoints and density of beliefs by referencing the same charts from before.  It can be seen that despite their different shapes, the mean and median view of all three distributions is the middle.  Therefore, for all three, the fairest choice of policy would be something near the middle.

Let’s note see the implications of this starting with a world depicted by the top-left, a normal distribution of stances and ideas.  Here, we have a wide range of opinions from very left to very right.  However, the vast majority of people have a stance near the middle.  By adopting a policy near the middle, we can see that although most people will not get exactly what they want, the vast majority of people are pretty satisfied.  This distribution is likely how most asset price beliefs are distributed as well.  For a typical asset, some people think it is vastly undervalued, some people think it’s vastly undervalued, but most will price it near the current market price.  Assets that follow this distribution are not traded very often, and therefore are not very volatile.

Now let’s think about the distribution on the top right, with high density in two bimodal peaks that are pretty far from each other.  This time we can start with the market analogy.  Although rarer, there are some assets that follow this.  One recently that comes to mind is TSLA, with most people thinking that the stock is vastly overvalued or just beginning to take flight.  As of Q4 2020, it has become clear that people who bet against TSLA universally did pretty poorly.  However, before the stock’s meteoric rise in 2020, it was incredibly opaque on how the company would perform.  Even now, with a stock price of nearly 10x that from a year ago, the future of the company is still pretty unclear, with an incredibly large range of estimates.  Because of this uncertainty, it is little wonder that the stock has extremely elevated realized and implied volatility.  Having, a bimodal distribution for policies will have a similar effect.  A fair decision in the middle of the curve will please almost no one, as most individuals are congregated very far away.  Additionally, much like how differing opinions in stock price from its current fair value will cause it to be vigorously traded, differing opinions on policies will cause it to be vigorously fought over, yielding increased volatility in society.

Being politically closer to the bimodal distribution has a few implication.  The first is that everyone would in the long run be happier if they made some effort in understanding their opponents to try to find some common ground since this, in aggregate, would move society towards a more understanding normal distribution of views.  Some people will be right, and some will be wrong.  However, what’s more important is that people ultimately converge towards what is right.  In finance this is called price discovery.  In politics it’s called listening and implementing.  

More realistically, if we must be stuck in the bimodal world for the short run, it is important to keep things in perspective.  Policy decisions will be made that you and most likely many others will be deeply upset by.  This group will ironically include your fiercest opponents.   Although this policy is universally despited, it is technically the “efficient” policy for society.  However, like the market, this efficiency can only be reached when certain conditions are met.  The first is that you actually have to participate.  If you don’t trade a stock, your information isn’t incorporated into price.  Likewise, if you don’t politically engage, your viewpoint won’t be incorporated into policy.  

There is also flip-side to this though.  Would you invest in a stock that you knew absolutely nothing or very little about?  Would you invest in a stock because some guy on TV or a friend told you about without doing your own research?  For the first question, I believe almost everyone would say no.  For the second, some people with a lot of faith in others may say yes, but I would guess most people would probably also say no (although for the yes people, I would strongly recommend you at least do a little of your own research).  However, when it comes to voting, this what most people do.  I certainly don’t want to discourage people from voting at all, but I do want people to get the most value from their vote.  After all, even though voting is monetarily free, there is still an opportunity cost of getting registered, waiting in line etc.  It would be a shame later discover that what you initially invested (voted) for is different than what you thought.

Lastly, over the past few decades, we have seen that technology has drastically decreased the costs of trading allowing more people to participate in the markets.  Likewise, I am hopeful that going forward, technology and other advancements, will be developed and embraced for voting as well to make it easier for all individuals to contribute towards civic engagement.