There is unflag option where you can unflag your own flag, but it doesn't counter other peoples flags, IIRC. I'm not sure about that now, since flag right has been removed from my account some time ago, and I don't see neither flag nor unflag links anymore.
Consider your front page. It's the same as everyone else's front page. The ranking of the items is a function of how old each item is, how many points it has, how many flags it's got, whether it's trip a filter, etc.
Now I flag an item. That penalizes the item and causes its computed value to fall. This in turn may cause its position in the rankings to fall, and thus will affect the front page.
But the front page is your front page, and hence my flagging an item can affect "your" front page.
