The beauty of it comes in the counting of the votes. Let's say you have three hypothetical candidates... for the sake of illustration let's call them "Al", "George" and "Ralph" and let's say that Ralph is the candidate found interesting mainly to the folks on the fringe of mainstream politics. In the existing system, voters have to choose one of the candidates... but the folks who want to vote for Ralph may in fact like Al over George if Ralph doesn't win. Today, since they can only vote for one, they have to choose Ralph, and in so doing, my wind up with George.
In the preferential voting system, voters would rank the candidates. So the folks who vote for Ralph could indicate that their second choice was Al (if they so chose). So if neither Al nor George had a majority, basically what happens is that Ralph's votes get dropped out and the 2nd choice (if there is one) for each of the people who voted for Ralph is now counted. Let's assume most folks who voted for Ralph probably had a second choice of Al - suddenly Al gets a whole chunk of votes and it's probably enough for him to win.
An interesting aspect of this is that it might also free more people to vote their conscience. For instance, there may be many people who voted for Al who really wanted to vote for Ralph, but voted for Al because they didn't want George and feared a vote for Ralph might give George the victory. So they gritted their teeth and voted for political reality versus what they really wanted. With a proportional system, more people might be inclined to vote for the candidate they actually want versus the candidate they feel they have to have.
It is, to me, an interesting idea and one that I've thought had merit since I first heard about it from some Australians back in 2000 who said this was the way they did it and convinced me that it made sense. Now, my illustration was with only 3 candidates, but obviously you could have many more.
In fact, here in Burlington, there are five candidates, and so when the counting is done tonight if no candidate has over 50% of the vote, candidate #5 will be eliminated and those who vote for him/her will have their second choices counted. If no one still has 50% of the vote, then #4 will be eliminated, and the next choices of those who voted for #4 will be counted... and so on until someone gets over 50% of the vote.
There's a nice flash animation that shows this process graphically. It will be interesting to see the reaction tomorrow.
Now if only we could have this for national elections... :-)