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Investing Decisions and Political Preferences: Promoting Investing Promotes Voting for Conservatives

Two Finnish economists found a correlation between investing and political preference:

Prior studies of stock market participation focus on transaction costs but leave little room for individual preferences. We investigate unique data sets on zip code and individual levels, and show that stock market participation is strongly associated with right-wing political preferences, even after controlling for such factors as income, wealth, and education. A natural experiment shows that local telecom demutualizations, which created a large number of involuntary stock market investors, increased right-wing voting in the relevant areas. We find support for the idea that a previously omitted ideological factor is an important determinant of stock market participation.

Why? they suggest:

The ideological factor could well operate in various ways in investment decisions. First, some people might shun a particular financial asset due to a discrepancy between their own moral values, and those they perceive to be related to that asset. This is the interpretation we emphasized earlier. Second, beliefs could arise endogenously with ideology, so that people will “believe what they want to believe” (Bénabou and Tirole, 2006). Consistent with this idea, people may believe that their own political views are also optimal for the society at large, and will hence ultimately prevail. Specifically, left-wing voters may expect a strong social safety net in the future, decreasing the need to ensure retirement income through personal savings. Conversely, right-wing voters may be motivated to save for their own good because they expect that the social safety net will weaken in the future. Note that in this scenario left-wing voters would be investing less in stocks, not because of ideological issues related to the equity market, but as a byproduct of their overall lower savings rate, consistent with their broader ideological position. Third, due to their more favorable general attitude towards the stock market, right-wing voters may have higher stock return expectations, and therefore invest more. Ideological issues specific to the equity market, the perceived need for personal savings, and return expectations can thus all be fundamental potential causes of the differences in investment behavior that we document.

Their finding that “receiving exchange listed shares increases right-wing voting” suggests that Republicans are making the right political decision when they seek to promote investing while Democrats are acting rationally when they oppose things like private social security accounts.

In related news, a UT economist reports:

We find that political affiliations influence people’s optimism. When people are more optimistic about the domestic economy, they are less likely to invest in foreign assets (i.e., exhibit stronger home bias). They also exhibit lower overconfidence because they think they are unlikely to perform better than their inflated forecasts of the domestic economy. We also find that political affiliation influences portfolio performance. Specifically, throughout all months of the year 2002; when Republicans been in power in all houses and by controlling for investors’ characteristics, Republican investors significantly outperformed others approximately by 1.37 percentage points. This finding can be interpreted via three factors: dissemination of private information to Republican investors by word-of-mouth; preference by Republican administration for business contracts with other Republican investors; and less overconfidence by Republican investors. To strengthen our interpretations, we examine whether Republican investors outperform others when the Republican Party is not in control of all houses, and find no statistical evidence to show Republican investors outperform others.