Process of Selection
Electors for each political party, Democrat and Republican, are nominated at state party conventions or are voted on by each party's state committee. In general, electors are chosen for their political connections or dedication. Although the electors are not technically bound by any obligations to the popular vote, or in many cases their political party, the overwhelming majority of electors choose to vote in the same way as their pledges.
The Constitution
The modern Electoral College (ballots for both president and vice president) was actually established through an amendment, the 12th. The College was designed as a compromise between representation and every citizen directly voting for their chosen candidate and to be independent from the other branches of government, like Congress. The ways that electors are chosen by parties is established in the 14th Amendment and 24th Amendment. The Supreme Court has also upheld the constitutionality of laws that allow prosecuting or fining electors who vote against what they are pledged to, but the penalties are very rarely carried out.
Voting
Most states have a winner-takes-all system for the electoral votes that go to presidential and vice presidential candidates, with the exception of Maine and Nebraska, where votes are proportionally given depending on popular votes. According to procedure, electors vote in the House on January 6th and the votes are counted by two members of the House and two members of the Senate. The sitting vice president oversees and announces the count.
If there is no majority in electoral votes, the House decides the result. This happened in 1800 and 1824, where Jefferson and John Quincy Adams won, respectively.
"U. S. Electoral College, Official," National Archives and Records Administration, http://www.archives.gov/federal-register/electoral-college/about.html
"U. S. Electoral College: Who Are the Electors? How Do They Vote?," National Archives and Records Administration, http://www.archives.gov/federal-register/electoral-college/electors.html#qualifications
"Constitutional Topic: The Electoral College," US Constitution Online, http://www.usconstitution.net/consttop_elec.html
As you mentioned we do hear about the electoral college throughout our lives, but we are never really told the specifics. I wasn't aware that he electoral college could vote against their state's popular vote. But since you mentioned that there is rarely any punishment for the electoral college to vote against their popular vote, why don't we see it happening more often?
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