Belief Disagreement and Portfolio Choice
Using a proprietary dataset of the portfolio holdings of millions of anonymized households with trillions in wealth, we test the central tenet of rational-expectations theories of asset pricing and portfolio choice — that agents believe in a common model and update their beliefs identically in response to public signals — against alternative theories in which agents hold different models of the world and update beliefs heterogeneously. We identify households that ex ante are likely to believe in different models of the world using political party affiliation (probabilistically inferred from zip code), and our public signal is the unexpected outcome of the US election of November 2016. Relative to Democrats, Republican investors actively increase the share of equity and market beta of their portfolios following the election. Inconsistent with the effect being driven by differences in hedging needs with common beliefs, the results are robust to controls for age, wealth, income, state, and even county-employer fixed effects.